Choice Hotels International, Inc. Aktie

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's Third Quarter 2026 Earnings Call. [Operator Instructions] Following the prepared remarks, we will open the line for questions.

I will now turn the call over to Allie Summers, Senior Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. Before we begin, please note that today's discussion includes forward-looking statements as defined under U.S. securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information, please refer to our filings with the SEC including our most recent forms 10-K and 10-Q.

These statements speak only as of today, and we undertake no obligation to update them. A reconciliation of any non-GAAP financial measures referenced in today's remarks is included in our earnings press release available on the Investor Relations section of choicehotels.com. Joining me this morning are Dom Dragisich, our Chief Executive Officer; and Scott Oaksmith, our Chief Financial Officer. Dom will discuss our business performance and strategic progress and Scott will review our financial results and outlook.

And with that, I'll turn the call over to Dom.

Thank you, Allie, and good morning, everyone. Before I turn to our third quarter results, I want to say how honored I am to be appointed President and Chief Executive Officer. I'm grateful for the Board's confidence, and I'm excited about the opportunity ahead for Choice Hotels. .

At our core, we are an asset-light franchiser serving value-minded travelers. The principle is simple. When our franchisees succeed, we succeed. Our focus is on returning to the fundamentals that have driven our success for decades, strengthening our core franchise business, delivering greater value to franchisees and guests and executing with greater urgency, accountability and discipline.

Choice's operating priorities are clear: first, accelerate U.S. net rooms growth and establish a sustainable growth trajectory. Second, strengthen franchisee economics by further improving our commercial competitiveness, helping our owners capture more demand, lower their costs and operate more effectively. And third, return to a more capital-efficient model that generates stronger long-term free cash flow. In the third quarter, we made progress against all 3 priorities. Let me start with net rooms growth. Our U.S. net rooms year-over-year growth rate improved for the third consecutive quarter and is now flat. Together with continued international expansion, global net rooms increased 1.7% year-over-year.

As anticipated, we expect a more meaningful acceleration in U.S. net rooms growth in the fourth quarter to approximately 1% year-over-year. U.S. RevPAR increased 3.8% year-over-year, ahead of our expectations and a clear step-up from the second quarter, driven primarily by higher occupancy with rate growth also accelerating. We see further opportunity to improve rate performance over time as we advance our revenue management initiatives to optimize pricing. Demand growth was led by business travel, while leisure trends improved as the quarter progressed, reflecting the resilience of the value-minded travelers we serve.

World Cup demand contributed about 40 basis points to quarterly RevPAR growth. We also continue to benefit from infrastructure-related demand, including data center development. Approximately 30% of our U.S. hotels are located within 10 miles of a major data center and those hotels delivered more than 400 basis points higher RevPAR growth than the rest of our system during the quarter. Importantly, our relative RevPAR performance also improved sequentially and an early indication that our commercial initiatives are helping us capture a greater share of demand. The gap with the industry is narrowing, and we see further opportunity to improve our relative rate performance. Demand strength continued into October with U.S. RevPAR up approximately 7% year-over-year for the month, supported by gains in both occupancy and rate. On that basis, we are raising our full year RevPAR and adjusted EBITDA outlook. While we are encouraged by the acceleration in our core top line performance, we recognize that higher in-year operating expenses have limited the full year benefit flowing through to earnings.

We expect expense growth to step down in 2027, allowing more of our revenue growth to translate into earnings. Scott will walk through the details. Finally, on capital allocation, our historical hotel development programs are nearing completion. Capital recycling is underway, and we now expect significantly lower net capital outlays going forward.

Turning to U.S. net rooms growth. We are focused on retaining and adding the right hotels to our portfolio. We are making steady progress in retaining hotels. We're engaging franchisees earlier in the renewal process. with clear accountability across our development and retention teams. Our focus is on improving retention while maintaining the quality and long-term economics of our franchise system. As a result of this disciplined approach, approximately 2/3 of rooms exiting our system came from hotels ranking in the bottom quartile for guest satisfaction. And these exiting hotels generated approximately 25% less royalty revenue per hotel than the system average.

U.S. room openings increased 17% year-to-date despite declining in the third quarter against strong prior year comparisons. We expect strong growth in U.S. room openings for the full year, supported by our historical year-end opening patterns with roughly 1/3 of annual U.S. room openings typically occurring in the fourth quarter. Conversions remain an important advantage for choice. We've reduced the cost of joining our system and tailored property improvement requirements to focus on what matters most to guests, making conversions faster and more attractive to owners.

Of the U.S. conversion rooms opened year-to-date, approximately 2/3 opened within just 3 months of signing. We're also seeing strong development activity that supports future rooms growth. U.S. franchise agreements increased 24% year-over-year in the quarter, and our U.S. conversion pipeline grew 29% year-over-year and represents over 1/3 of total pipeline rooms. Together, improving retention and continued development activity are strengthening the foundation for sustained U.S. net rooms growth.

Stronger franchisee economics are fundamental to sustaining rooms growth. When owners are more profitable, they are better positioned to reinvest in their hotels, renew their franchise agreements and grow with us. Over time, that translates to the more durable earnings and stronger free cash flow for choice. Over the past 2 months, I've met directly with more than 900 franchisees across the U.S. and Canada. I've come away energized by the positive tone of these conversations and the alignment I'm hearing around our shared priorities.

To help franchisees grow revenue, our biggest opportunity is capturing a greater share of demand from the value-minded travelers we serve. We're beginning to see encouraging results from our commercial investments reflected in improving relative RevPAR performance. Choice Privileges is a good example. Since the relaunch earlier this year, new members who have stayed with us generated 12% more revenue per member than comparable new members last year. The program grew 7% to 78 million members, while Choice Privileges members share of revenue increased by more than 140 basis points year-over-year during the quarter.

We recently added point sharing to give members more flexibility in how they use their rewards. Choice Business Direct is also expanding our reach among small- and medium-sized businesses with approximately 75% of enrolled businesses new to choice. Since its launch in May, revenue from existing customers who adopted the platform has increased 25% year-over-year, contributing to growth in our broader small- and medium-sized business segment where revenue increased 18% year-over-year in the third quarter.

Our AI-enabled easy bid platform is helping owners win more group business, improving RFP win rates by 210 basis points and supporting 27% year-over-year growth in group revenue during the quarter. We're also adapting our digital content strategy as travelers increasingly use AI-powered search tools. Our investments in richer, more relevant hotel content are helping improve discoverability across these platforms.

While still a very small share of overall website traffic visits to choicehotels.com originating directly from large language models increased more than tenfold year-over-year in the third quarter. To help franchisees lower costs, we are focused on making our hotels more affordable to build, convert and operate. Building on the prototype and procurement savings we discussed last quarter, we've reduced reputation management fees by approximately 30% through our AI-enabled smart response tool.

We've also introduced targeted fee incentives for hotels that achieved strong guest satisfaction and operating performance. In addition, we're improving distribution economics to generate additional savings for franchisees and expanding the pilot of Charlie, our AI teammate within the property management system to simplify routine tasks. Together, these initiatives strengthen the value we deliver to franchisees, supporting stronger retention, future development and sustainable capital-efficient rooms growth.

Our third priority is returning to our asset-light franchising routes. Our hotel development investments helped establish and grow Cambria and Everhome Suites. With our own development programs winding down, we're reinforcing our focus on franchise-led growth and beginning to unlock capital from our owned hotel portfolio. We've already begun that process. Since quarter end, we've sold 2 owned hotels while retaining franchise agreements for both reserving recurring franchise revenue.

Returning to our asset-light routes also means being disciplined about where we invest for growth. Harvest Toast is 1 example. It's an asset-light subscription platform with recurring revenue that expands our reach into complementary outdoor travel serving customers whose travel preferences align closely with those of Choice's value-minded guests.

Harvest Coasts has approximately 300,000 subscribers. Based on our consumer insights, we estimate that approximately 2 million Choice Privileges members participated in RV travel over the past year, highlighting a significant opportunity to expand Harvest Host's reach. We underwrote the acquisition based on Harvest Host stand-alone economics with potential benefits from Choice's loyalty and commercial capabilities representing upside. Harvest Host will continue operating independently under its existing leadership, complementing our core hotel franchising business and expanding our opportunities for asset-light growth.

The value-minded travelers we serve continue to demonstrate resilience, supporting travel demand across our system. Looking ahead to 2027, we see opportunities to build on this progress through continued U.S. net rooms and RevPAR growth, supported by our strengthening commercial capabilities and the operational changes we've made across the business. I also want to thank our associates and franchisees for their continued commitment to choice and the guests we serve. We are confident in our ability to translate this operating progress into stronger financial performance, more consistent results and sustainable long-term value for our shareholders.

With that, I'll turn the call over to Scott.

Thanks, Tom, and congratulations again. I look forward to working closely with you as we execute on our priorities and drive stronger performance. Good morning, everyone. This morning, I'll cover our third quarter financial results, the key drivers of our performance and our updated full year outlook. Third quarter adjusted EBITDA was approximately $193 million, up 1% year-over-year. Revenues, excluding reimbursable revenue from franchised and managed properties increased 3% year-over-year to $285 million. Adjusted diluted earnings per share increased approximately 11% year-over-year to $2.33, benefiting from higher franchise and management fees and share repurchases.

As we highlighted last quarter, our third quarter 2025 results included elevated liquidated damages revenues, which declined approximately $6.2 million year-over-year, consistent with our improving franchisee retention. Excluding liquidated damages from both the current and prior year quarters, adjusted EBITDA and revenue each grew approximately 5%. Underlying performance benefited from higher U.S. royalties driven by stronger RevPAR and royalty rate expansion, along with growth in franchisee programs and services revenues and higher international revenues.

These benefits were partially offset by higher adjusted SG&A expenses which I'll discuss shortly. Turning to RevPAR. Global RevPAR increased 3.9% year-over-year in the third quarter on a currency-neutral basis. As Dom discussed, U.S. RevPAR increased 3.8% year-over-year driven by a 160 basis point increase in occupancy and a 1% growth in rate. Performance was strongest in the West, South Central and Midwest regions. International RevPAR increased 3.7% year-over-year on a currency-neutral basis, with growth across all regions led by a nearly 9% increase in the Caribbean and Latin America.

Turning to net rooms growth. Global net rooms increased 1.7% year-over-year, reflecting continued international expansion. In the U.S., net rooms were approximately flat year-over-year, with room exits declining 23% and gross room openings declining 8% against strong prior year comparisons. Importantly, U.S. room openings increased 17% year-to-date. As Dom discussed, we continue to expect stronger fourth quarter openings with conversions expected to represent approximately 90% of our 2026 U.S. room openings.

Extended Stay remains a key growth driver, delivering 13 consecutive quarters of double-digit rooms growth. and representing more than 40% of our U.S. pipeline. We also recently opened our 600th Extended Stay hotel, marking another important milestone in the expansion of our portfolio. Beyond extended stay, we are seeing encouraging development activity across our core transient brands. U.S. franchise agreements awarded for our mid-scale and economy transient brands increased 10% year-over-year while the pipeline for these brands expanded approximately 2% sequentially.

Additional detail on our U.S. net rooms trends is included in today's supplemental materials. International net rooms increased 7.3% year-over-year, reflecting growth across EMEA, Asia Pacific and the Americas. In Canada, net rooms increased 5.1% year-over-year supported by our transition to a direct franchising model, which is increasing its earnings contribution and creating opportunities for future growth. Our global pipeline also expanded sequentially, supporting future rooms growth across the system.

Along with rooms growth in RevPAR, royalty rate expansion remains an important driver of our organic franchise revenue growth. During the third quarter, our U.S. average royalty rate increased 8 basis points year-over-year to 5.23%, reflecting a continued mix shift towards higher royalty brands and contractual rate increases, supported by the stronger franchisee value proposition Dom discussed. Beyond royalties, our franchisee programs and partnerships businesses leverage the scale of our system to generate additional fee-based revenue while strengthening franchisee economics. Partnership services and fees decreased 2% to $28.3 million in the quarter, primarily reflecting the timing of certain revenues.

We expect low to mid-single-digit growth in this business for the full year. We're also seeing growth across our franchisee technology solutions, driven by increased adoption of our revenue management tools and higher fee revenue from our cloud-based property management system. Adjusted SG&A increased approximately 5% year-over-year during the quarter. primarily reflecting higher accounts receivable reserves, certain onetime investments in strategic initiatives and higher international operating expenses.

Separately, during the quarter, we terminated an agreement involving an option to acquire a European hospitality business, operating primarily under a lease-based model. The termination resulted in a onetime charge of approximately $24 million. which impacted reported net income, but is excluded from our adjusted results. The termination eliminates any further funding obligations under the agreement. The decision reflects our disciplined approach to capital allocation and our focus on directing capital towards opportunities aligned with our asset-light franchising strategy.

Turning to capital allocation. Our transition back to a more asset-light franchising model continues to progress. Year-to-date, net capital outlays for hotel development declined 56% year-over-year to $36 million as we completed our own Cambria development program and continued winding down our remaining Everhome investments. We now expect full year 2026 net capital outlays for hotel development-related activities to be approximately $20 million compared with $103 million in 2025. We expect development capital outlays across our owned hotels and joint ventures to decline substantially from the approximately $70 million to $75 million projected for 2026 with only minimal funding needs expected after the first half of 2027.

We've also begun recycling capital. Subsequent to quarter end, we completed the sale of 2 owned hotels, generating estimated net cash proceeds of approximately $34 million, while retaining franchise agreements for both properties. We expect an additional hotel disposition in or before the first quarter of 2027, subject to customary closing conditions. Additional modeling information on these initial dispositions is included in our supplemental materials.

As Dom noted, we are positioning choice to generate more proceeds from asset sales than we invest in development by 2027 as our remaining commitments decline and dispositions progress. Our initial focus is on Cambria, giving its more established operating history while allowing our recently opened [indiscernible] Hotel is time to mature before pursuing dispositions. We are taking a disciplined asset-by-asset approach to maximizing value while preserving long-term franchise relationships. Transaction timing and economics will vary based on individual property performance, operating maturity and market conditions.

Separately, on October 1, we completed the acquisition of Harvest Host for approximately $130 million in cash and revolver borrowings. For the 12 months ended September 30, Harvest Host generated approximately $33 million in revenue and approximately $11 million in adjusted EBITDA. We will begin consolidating Harvest Host results in the fourth quarter and provide additional modeling context with our 2027 guidance in February. We expect Harvest Host to support growth without requiring significant incremental capital investment.

Our capital allocation framework remains unchanged. And -- as we transition back to a more asset-light model, we will continue to prioritize attractive return investments that support long-term growth, maintain a stable dividend and return excess capital to shareholders through share repurchases. Turning to the balance sheet. We ended the quarter with total liquidity of $928 million and a net leverage of 3.2x adjusted EBITDA within our targeted range of 3 to 4x. Our quarter end cash balance reflects borrowings made in advance of the October 1 Harvest Host acquisition. Following the acquisition, net leverage remains within our targeted range.

In August, we completed a $500 million term loan refinancing, lowering our borrowing spread and increasing available capacity under our revolving credit facility. During the first 9 months of the year, we generated $122 million of operating cash flow compared to $185 million in the prior year period. The year-over-year decline primarily reflected the contract termination payment, higher franchise agreement acquisition costs associated with increased year-to-date U.S. openings and higher marketing and reservation system reimbursable expenses.

For the full year, we expect a net marketing and reservation system reimbursable deficit of approximately $135 million, reflecting elevated investment in franchisee-facing and guest delivery capabilities. As a reminder, these programs are structured to operate at a breakeven over time, and we expect the deficit to begin narrowing in 2027. Through September 30, we returned $211 million to shareholders, including $172 million through share repurchases and $39 million through dividends. We now expect repurchases of approximately $200 million of shares for the full year. Based on our third quarter performance and the underlying operating trends we discussed today, we are raising our full year U.S. and global RevPAR outlooks and our adjusted EBITDA guidance while narrowing our adjusted EPS range.

We now expect full year 2026 adjusted EBITDA of $641 million to $651 million, raising the midpoint by $3.5 million. Our updated outlook reflects stronger global RevPAR expectations and higher U.S. royalty rate expansion, partially offset by higher adjusted SG&A. The fourth quarter contribution to adjusted EBITDA from Harvest Host, net of the impact of our recent hotel dispositions is expected to be approximately $1 million.

We are narrowing our full year adjusted diluted earnings per share guidance to $6.92 to $7.07, the updated range reflects higher expected adjusted EBITDA, offset by higher interest expense and lower expected equity and earnings of affiliates. We now expect full year U.S. RevPAR growth of 1.5% and to 2.5% and global RevPAR growth of 1.5% to 2.5%, reflecting stronger underlying operating trends and continued commercial execution.

Based on the midpoint of our updated full year outlook, we expect fourth quarter U.S. RevPAR growth to be higher than the third quarter, supported by the momentum we've seen into October. We estimate the full year benefit of the FIFA World Cup at approximately 30 basis points. We now expect U.S. average royalty rate expansion of approximately 9 basis points for the full year, incorporating tougher comparisons in the fourth quarter.

We continue to expect approximately 1.5% global net rooms growth for the full year, supported by international expansion and a more meaningful acceleration in U.S. net rooms growth in the fourth quarter. In the U.S., we expect net rooms growth of approximately 1% by year-end, supported by improving year-over-year retention, seasonally stronger fourth quarter conversion openings and more favorable year-over-year comparisons. We expect strong year-over-year growth in the U.S. room openings for the full year and continue to anticipate an approximately 250 basis point improvement in the U.S. net exit rate compared with the last year.

Excluding Harvest Host, we now expect full year adjusted SG&A to increase approximately 9% year-over-year compared with our prior expectation of mid-single-digit growth. This reflects increased spending on certain strategic initiatives and AI-enabled capabilities along with higher accounts receivable reserves. We do not expect the same level of spending on these initiatives next year and anticipate adjusted SG&A growth, excluding harvest host, moderating to the low to mid-single digits in 2027.

With development capital requirements expected to decline substantially in 2027, capital recycling underway and the reimbursable deficit expected to begin narrowing, we see an opportunity to strengthen free cash flow generation over time. Overall, our third quarter performance reinforces our confidence in the progress we're making against our operating priorities. We're focused on translating these improvements into consistent results and sustainable long-term shareholder value.

With that, Dom and I are happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Lizzie Dove with Goldman Sachs.

I wanted to ask about U.S. rooms growth. Obviously, some progress there, and it's a big acceleration implied in Q4. Could you talk more about your confidence of that? I know you talked about some seasonality there, but also just more broadly, what you're seeing in particularly the conversion environment, given it's such a big driver for you, both in terms of Q4 and just longer term, given we've heard some kind of mix commentary across the space this quarter.

Absolutely. Thanks, Lizzie. I'll take that one. So as I had mentioned, obviously, in the prepared remarks, the net rooms growth is certainly my #1 operating priority for the company. Obviously, we've seen very strong quarter-over-quarter improvements in that net rooms growth figure. 3 consecutive quarters of improvement. So when you take a step back, though, I think what's even better is that you are seeing strong results across all 3 component parts, right, where you have openings are up 17% year-to-date, exits are down 44% year-to-date, development agreements are up 36% year-to-date. So that's really a good setup going forward, especially when you take a look at those development agreements. .

And when you take a look at the mix, it gives me even more confidence, right? Because we are still growing in that mid-scale plus category. But at the same time, we're seeing a little bit of a both [indiscernible]. And so I mentioned this last quarter, consistent progress, I think, leads to confidence and we're sitting in a very confident spot heading into Q4 we mentioned historically, about 1/3 of our annual openings typically occur in Q4. Conversions are actually opening even more quickly. And so when you take a look at that side of the business with 90% of our openings this year really being conversions and just where you're seeing that conversion pipeline, we have really good visibility heading into Q4.

So I feel great about that 1%, frankly. And then when you just take a look at just the conversion-led model, to your question around the sustainability in the setup for 2027, the conversion-led model that we have, it is a differentiator. So we think that this is absolutely momentum that's going to be sustainable as we head into 2027, feeling really good about the setup and feeling very good about the top operating property for the year.

Great. And then one follow-up, slightly different topic, but the relative RevPAR performance has obviously been a big focus for you guys. You saw a little bit of sequential improvement. But with these kind of commercial initiatives that you're working on, could you give us some color of just how -- the kind of phasing of that? And how long do you think those kind of take to kind of bear more fruit when it looks -- when it comes to the relative performance versus [indiscernible]?

Sure. I mean, obviously, we're in the early innings of some of these commercial investments. We talked about the $60 million or so of spend last year into this year, which is also driving that marketing and reservation system fund deficit. Obviously, we've leaned in on the commercial side, but certainly encouraged by the RevPAR improvement and the progress that you saw, you saw a pretty dramatic step-up from Q2 into Q3.

We did narrow the gap to your point. Obviously, not where we want to necessarily be just on a relative basis, but we're seeing that gap continuing to narrow quarter-over-quarter, again, much like the net rooms growth metric. Part of the gap was geography, customer mix. We're under-indexed, urban, event-driven, that type of business. But again, the most important thing is that we have to be focused on what we can control and the execution. And you mentioned the commercial tools.

So we are encouraged, most importantly, that what we're seeing is an occupancy-led recovery. So when you think about those commercial capabilities, we have the easy bid tool. We relaunched the loyalty program. I think the biggest game changer for us on the rate side of the house is going to be raised, which is our rate management tool, brings together pricing, inventory, channel management altogether in one place. So that's going to be rolled out this quarter. And so you're going to continue to see the benefits of that obviously as the ramp occurs heading into 2027.

So -- when you take a look at the business side of the equation, we're already starting to see the results of those commercial investments. I think the most important opportunity that we have in front of us today is on this raise platform because it really is rate where we have the ability to drive additional performance. So you're going to see that probably showing up more in Q1, Q2 of next year. But again, I think the setup is there for a really strong 2027.

Your next question comes from the line of David Katz with Jefferies.

I wonder if you could give us I appreciate all of the detail. I wonder if you could give us just a little more insight into what's available to be sold on the own side, right? Help us gather an inventory and you're not going to guide us to a specific number. But notionally, what's available to be sold, I imagine you have some estimates that maybe you can qualitatively give us a little insight.

Thanks, David. I'll take that one. So as we highlighted in our supplemental materials, we do have several hotels that are on the owned side that'll be able to sold. So we own 17 hotels when you adjust for the 2 that we've sold in the fourth quarter. And so those are really the pool that we're focused on today.

When you think about the total amount of capital related to that, we're really going to be focused more on the Cambria today. Those are more mature assets that we look at we can move to sell those -- and then as the ever homes become more efficient -- or excuse me, ramp up and are ready for disposition, those will come in the second half of that. So today, post sale, we've got 11 -- excuse me, 9 Cambrias left -- we still have 2 Radissons left and 5 ever homes that we are ready to sell.

So we're focused on the Cambria. We've had some success in some early ones that we sold here in the second -- excuse me, in the fourth quarter, have 1 were under contract that should close end of the quarter, beginning of next year and continue to work through market by market of selling those. When you look at kind of the capital that's outstanding on that, as we've talked about in the past, really what we have is about $455 million coming into the quarter of owned assets available for sale that will be reduced by about the $38 million on the assets that we talked about. So that's kind of the pool we're working on today. About $330 million of that's Cambria.

Your next question comes from the line of Dan Politzer with JPMorgan.

I wanted to talk a little bit about free cash flow and the conversion in the quarter and how you think about that kind of evolving over time, especially to the extent you're starting to recycle more capital into 2027. Any kind of way to also think about your kind of willingness to return capital to shareholders as that capital recycling ramps up?

Sure. So let me hit it at a high level, and then I'll hand it over to Scott more for the details on just capital allocation and whatnot. But I think when you take a step back, we absolutely see a meaningful opportunity to really strengthen free cash flow generation in 2027. And a lot of that is really what we talked about returning to that asset-light franchising routes, a much more efficient capital model.

I see Three primary drivers of that, right, which is, first and foremost, it's the development capital requirements that are coming down significantly. We talked about the fact that we are completing the owned hotel development, minimal funding needs now with only 1 hotel under construction through first half of 2027. We are seeing capital recycling we sold those 2 hotels. We expect that additional disposition in early 2027, and obviously going to continue to look for more dispositions.

But most -- very importantly, I think, has really been the drag on the marketing and reservation system deficit in 2026. And I talked about a lot of that is because of the commercial investments that we made a lot of that in the first quarter of the year was a softer RevPAR environment. So when you take a look at that, our ability to flex that as we head into 2027. And really, the revenue makeup. Obviously, what gives me the most optimism to return to free cash flow improvements in 2027, it's the top line. You're seeing all 3 of our key revenue levers inflect with regards to net rooms growth, RevPAR, royalty rates continue to expand. So we think that, that growth on the top line is very much sustainable heading into 2027. So those are all going to be tailwinds for us.

And as it pertains to the actual conversion, I'll let Scott hit on that one.

Yes, we see a real meaningful opportunity to improve the conversion. We're moving beyond a period of that elevated investment now that we've achieved our strategic objectives. And so the capital intensity of the business should decline materially here going forward. And we talked about the development outlays being down 56% year-over-year and down 80% for the full year. So as we look at our capital allocation hierarchy, first and foremost, we always want to invest in the organic growth of the business. But as we get back to more of our asset-light routes here, we don't expect a material amount of capital needed to grow on an asset-light basis.

So it really provides us the opportunity to return that excess capital to shareholders. We still remain well within our targeted leverage levels. And as we've talked about this year, we did give for the first time guidance on share repurchases now that we have more visibility into our cash flows given the step down in the capital outlays for self-development. So we expect that to continue and really to prioritize shareholder returns as we go forward.

Yes. Just to clarify, for the free cash flow conversion this year, any parameters of which to think about that? And then maybe on a go forward, if we can get back to that 50% to 60% type range?

Yes. So going forward, where you'll see the meaningful step down, as Don mentioned, is clearly on the marketing and reservation reimbursables. We are completing a more heavy investment in that this year. So we expect that to step down materially next year, so to get us back to us over the next couple of years to that 55%, 60% free cash flow conversion where we've been historically.

Your next question comes from the line of Michael Bellisario with Baird.

Dom, on M&A, I mean should we think about real estate sale proceeds being used to fund more asset-light M&A like harvest host or those kind of separate buckets? And then maybe just also remind us of your view on sort of just appetite for a couple of buckets, larger scale M&A, sort of the more traditional hotel brand M&A and then adjacent businesses like the Harvest Host deal.

Absolutely. So the Harvest Host deal was certainly opportunistic. I would tell you that what Scott said is spot on with regards to we're prioritizing organic growth first and foremost. Obviously, if there are smaller tuck-ins that are net beneficial both to our owners and our shareholders, we'll obviously consider that. And I think Harvest Host certainly fell in that bucket. .

But we also think our stock is cheap right now, frankly. And I think to Scott's point, there's a reason why we gave share repurchase guidance this year. It's the first time in my 10 years since I've been here that we provided share repurchase guidance. We're trading at a historically low multiple and we're seeing a lot of great inflection in the business itself. So it's not to say that we wouldn't do something that's a little bit more tuck-in in nature, probably immaterial.

But you mentioned Harvest Host, and I think broadly speaking, -- that was an acquisition that was very much aligned with the asset-light growth strategy, right? It was subscription-based recurring fee model, -- it expanded our reach into an outdoor travel segment that we actually were underpenetrated in. And the reality is we underwrote this on a stand-alone basis. So it was an attractive turn even without the overlap. Obviously, we think that there's tremendous overlap with the 2 million customers that we talked about on the call, 300,000 subscribers.

So even keeping this business as a stand-alone, we think that it's a really strong return. But then when you consider the CP overlap and whatnot, we think it's certainly more beneficial for our franchisees as it pertains to other demand-driven opportunities for them in the future could open up additional opportunities for them. And the reality is we want to keep this thing as a separate business unit. It doesn't distract from the core strategy. And most importantly, I think as it pertains to that financial return for our investors as well. So I think it passes the litmus test both for the franchisees as well as our investors.

Got it. And then just one follow-up on this termination payment. Was this for a legacy deal? Or was that something that sort of came and went in the last plus or minus 3 months.

Yes. It was an opportunity for us. We actually had an option to purchase the business that eventually migrated to an obligation. But as I shared, -- we are very much focused on asset-light growth. This was a group they were growing. They were supposed to continue growing through a franchise and managed operation, but their growth increasingly became lease-based -- and so while they were very healthy leases, and it was a company with great growth potential, just didn't align with the asset-light growth plans. And so we were not willing to take on additional lease exposure. We weren't willing to put that capital at risk, so to speak. And the reality is, as we just made the decision to terminate the arrangement rather than pursue a transaction that no longer really aligned with those strategic priorities as a company. .

And Michael, just to answer your question, yes, it was a legacy -- you had this relationship going back 4 or 5 years now.

Your next question comes from the line of Shaun Kelley with Bank of America. .

And Congrats, Dom, on the permanent announcement here. So just wondering if we could walk through a little bit of the -- just the owned and leased bridge for next year, right? So we -- I think you guys gave a little bit of the comments around harvest Host. But Scott, if you could just help us understand, one, where exactly is Harvest Host going to show up in the P&L? And then two, net of sales, and it sounds like with the third one coming here. Directionally, can you give us some sense on just how much O&L headwind to expect next year as that line item starts to kind of shift down both in revenues and more importantly, on EBITDA.

No problem, Shaun. So when you think about harvest host, most likely, just given the size of it, we'll probably include it in our other revenue line item, and it will also flow through in the SG&A. It's a pretty simple business. It's a subscription-based where the members spend annual subscriptions that range from $99 to about $180. And then primarily the cost are technology and customer acquisition. So most likely, we're still working through those disclosures, but that's where that will show up. When you think about the owned assets, the 3 assets that we are selling, they generate roughly about $12 million excuse me, the ones that were sold were about $12 million in revenue and about $2 million for full year in EBITDA and the 1 that's scheduled to be sold here at the end of the year is another $6 million and about $1 million in EBITDA.

So total revenue is somewhere between $18 million and $19 million with an EBITDA impact of about $3 million.

Your next question comes from the line of Stephen Grambling with Morgan Stanley.

You mentioned in the intro remarks some improved distribution costs for owners. Can you just elaborate on what you're seeing there? And perhaps remind us where your distribution mix is right now and how that may be changing or what tools you're leveraging to do that?

Yes. So I think distribution costs are obviously one big component. Broadly speaking, unit economics for our owners and just the entire ecosystem is critical here. And we talked a lot about some of the things last quarter with regards to reducing certain fees, piloting insurance program, FF&E costs, et cetera. But when you take a look at just the distribution cost, this comes down to just the improvements that we're seeing in the new loyalty program, in particular, you saw about 200 basis points of loyalty, increase the loyalty contribution last quarter.

You're seeing that sustain into Q3 and Overall, what we've talked about historically is proprietary is about 60% of our distribution into our owners. And the goal there is obviously continuing to increase that proprietary channel contribution to really protect our owner profitability. And so broadly, we're continuing to lean in as it pertains to AI and really positioning choice for the shift that you're seeing on the distribution side. We have made choicehotels.com accessible to AI agents, which really allows them to search, compare rates, complete bookings.

And so early innings in terms of the ability to talk about how the distribution landscape is going to change as it pertains to the cost. But the reality is we think what's sitting in front of us right now gives us an opportunity to wedge traffic away from those OTAs and ultimately increase that 60% going forward.

Your next question comes from the line of Patrick Schole with Truist.

As we think about earnings growth for next year, would you be so kind of just give us a refresher on some of the sensitivities specifically 1 point of RevPAR growth equals how much EBITDA, same thing for net rooms growth and then the royalty rates. I checked on the website for any presentation, I didn't see any updates on those. But you .

No problem, Patrick, let me hit it. I mean as you think about just the building blocks as we head into 2027, obviously, not going to give 2027 guidance. We're working through the planning process as we speak. But the building blocks to consider. First and foremost, it's on that operating side. So the 3 core levers we're entering 2027 with improving U.S. rooms growth, stronger RevPAR trends and the effective royalty rate. So every 1% on both net rooms growth in the U.S. and RevPAR is about $5 million each, and then 1 basis point of effective royalty rate is another $1 million.

So again, we feel very good about the fact that you're seeing that momentum and you see the opportunity on the rate side specifically as it pertains to RevPAR -- but you also see sustainable growth, obviously with international and our platform business as well. And then when you layer in, obviously, expenses, we think that there's going to be a meaningful step down in SG&A to that low to mid-single digits. So you'll likely see obviously a little bit more information as we enter 2027 here, and we provide official guidance in February, but those are really the building blocks at the highest level, Patrick.

Your next question comes from the line of Robin Farley with UBS.

[Technical Difficulty]. Okay. Great. I was not muted on my end for any of that, but okay. The question added to ask is going back to Q4 and the sort of acceleration in the domestic unit growth that you're talking about -- it sounds like you're saying it's mostly going to come from the removal rate being lower. I guess how do we think about that long term? Like if you get your point of growth because of sort of a reduction in removals or normalization removal, what can we conclude about sort of next year and the year after in terms of domestic units? Is it kind of back to maybe not necessarily growing if if the growth here is really just coming from lower renewals? Or just how to think about that being just Q4. .

So I think broadly, it's a both and. So I think we're going to see continued strength in terms of openings. I think obviously, we're up 17% year-to-date. I think that, that sort of trend can carry us into Q4. And frankly, just with the volume that you see in Q4 historically, obviously, we're anticipating a really strong openings quarter coming up here. Now I think on the removal rate, what you're seeing broadly speaking is our exit rate is improving about 250 basis points, and we could actually see a slightly higher improvement than that, really returning back to our historical retention rates.

And so we're feeling good about that side of the equation as well. I do think it's -- what you're seeing right now, Q4 into Q1 of next year is absolutely sustainable. Obviously, the conversion-led model is an important advantage in this environment. We have shorter development time lines. We have lower upfront investment costs, lower FF&E and conversion costs broadly speaking. And so what we've talked about publicly is the goal is to eventually get back to that 2% to 4% net unit growth or net rooms growth. And even in new construction environment that is muted, you're seeing kind of 50 basis points or less of supply growth, we think that we can get to that 2% even with a conversion-driven approach with 90% of our openings coming from conversions. I think you're going to need to see some tailwinds from a new construction perspective to get to that higher end in the long term. But broadly speaking, we feel very good about 1% plus this year, obviously, continuing to build on that as we enter 2027. And the ultimate goal is to get to that 2% to 4%. .

And as we move forward, Robin, our 2027 planning is still underway, but we would absolutely expect to see both an increase in openings year-over-year as well as reduced terminations. And I think you can really look at our pipeline and see the success we've had, particularly in the U.S. on the conversion pipeline, which is up 29% year-over-year and 6% sequentially over June 30. So -- we're seeing a lot of momentum there. We're seeing our franchise agreement execution is up. They were up almost 25% in the quarter. So we're seeing momentum on both sides. So it won't be just a retention-led growth going forward, but that's certainly a big piece of it and something we're we're focused on getting back to where we would have been historically.

Great. That's super helpful. And just 1 other number and you've gone out lots of data on carpet. -- could you say what percent of things or what percent of your pipeline is using human just when you're talking about kind of reducing what you've spent on new units or what you spend to get that unit growth. What percent of your projects are using key pipeline now? And where do you think that goes next year?

We haven't given out specifically the percentages, but I will say that we have seen an increased use of key money across the industry over the last couple of years. So we are more elevated than we have been historically. But where we're encouraged is that we haven't seen the amount of key money needed per deal increase over the last 12 months or so.

So we've seen that crest and some brands come down a little bit. And I think that's really a reflection of the value proposition and what we're offering owners that we don't need to continue to offer key money to affiliate with the system. So -- we're encouraged that it's cresting, and we do believe that over the next couple of years, we do think that will come down in an industry, particularly as the new construction environment improves, but it certainly has been elevated over the last 2 to 3 years.

Yes, Robin. So I think the bottom line there is just when you take a look at just the cumulative increase in key money, a lot of that has to do with the stronger development activity, the stronger net rooms growth that we've seen every deal continues to be evaluated on that long-term franchise revenue, the returns. We do IR paybacks, et cetera. But I think the most important thing that Scott said there is you're actually seeing the average incentive per deal come down through September or stay approximately the same. So again, we're encouraged that we're doing all the right things there and that we're actually seeing the progress on the top line as it pertains to the openings. .

Your next question comes from the line of Trey Bowers with Wells Fargo.

I guess first, just to put a finer point on that. I think the last time you gave us a key money update, it was around $120 million to $130 million this year. Is that still the expectation? And it sounds like maybe you think that kind of flattens out or declines in the years to come? Or is the expectation that's kind of the run rate from here?

Yes, we did give that guidance. We expect to be towards the upper end of that guidance, but generally still holds. In terms of the go forward, as Dom and I both mentioned that we have seen the amount per deal hold -- but we do expect an increase in openings here as we move forward. So really, any increase in key money going forward will be more a reflection of either the mix of moving up higher up in the chain scales or the absolute number of openings for the key money to increase. But generally, I think kind of this year's level slightly elevated for more openings is a good modeling assumption. .

And then if I could just get a follow-up in. It sounds like you guys are placing the kind of revenue and EBITDA of these owned assets about $6 million and $1 million. Is the expectation from here, we continue to see a kind of $17 million per property and like that property's EBITDA. I mean those seem like pretty great numbers. And I guess the last point of that, my quick math is us around $130,000 per key for Cambria. Any any kind of further detail around the individual asset sales would be amazing.

It really varies. We have product in many different markets, some of them in more secondary markets and some in urban -- top 50 RevPAR markets. So it's going to vary by asset. The Columbia hotel sort at about 11x multiple of its EBITDA. The numbers are skewed a little bit by the Radisson Red we had in downtown Minneapolis. That was not a contributor to -- the hotel was really struggling in that market as the home market has been. So that has pushed up the numbers a little bit. But I would say we're generally -- most of these assets will probably trade around a cap rate.

Your next question comes from the line of Brandt Montour with Barclays.

First, I want to hit on the termination progress and just sort of the year-over-year cumulative year-to-date termination decline. I want to understand a little bit more about what's driving that. There's -- I'm assuming you would not say that there's been a wholesale relaxation of brand standards, but in terms of maybe franchise agreement acquisition costs or key money? Is there any money being applied to retaining some of those deals? And if not one of the first 2 buckets, what is it that you would describe as driving that progress?

I think a lot of it had to do with the investments that we made in 2025 that are starting to come to fruition. It was an area that we were laser-focused on. I mentioned the fact that this was my top operating priority. So if you think about just the investments that we meet made from a people, process and systems perspective, really assigning accountability across the development life cycle, both on the opening side as well as on the retention side. we enabled our field teams with better systems, better processes, et cetera.

And we got ahead of expirations. I think in a lot of cases, if you look back to 2025 and previously, we were stubbing our own toes, so to speak. -- when we were fighting with 1 arm in our back as it pertain to not having this information at our disposal. I think we also had a pretty significant set of expirations based on a lot of the comfort cleanup that we had previously done, which was back in '13, 2014. So when you look at it from a timing perspective, there were a lot of windows and expirations. And we took an opportunity last year to really exit the lowest performers. When you take a look at approximately 2/3 of our room exit last year and into this year are coming from the bottom quartile for guest satisfaction.

Those are the types of things that we were looking at is really making sure that we were holding on to the best products possible. But this year, we've seen that subside quite a bit. And I think we're really executing on what we're talking about kind of both and because we have a right to win, obviously, in that economy and lower mid-scale as well. And so I think the absolute worst is behind us, and I expect the trends that you're seeing this year to continue well into 2027 and beyond.

Okay. And then on the comment you made about the tenfold increase in web traffic coming from AI. I know that's still small. But if you kind of look at just sort of the month-over-month trend line and maybe take it out to next year, what could that be as the percentage of total mix by next year sort of at some point next year? Just to give us some sort of sense, big picture of where of where that is.

Yes. It's a little too early to tell, to be honest with you. I mean visits did increase tenfold. But to put it in perspective, when you think about direct visits, that's about 1% of our volume. I know that 50% -- all the research we've done, 50% of research starts with an AI tool at this point or they look at what's available in that particular market. But still very much in the infancy phases, I would say.

I do think at the end of the day, like I said, the most important thing is making choicehotels.com accessible -- and so a perfect example of this is you can complete the entire booking process right now through [indiscernible], including secure payment. And so really, what we've been focused on is really building on the foundation to have kind of common shopping booking, loyalty service to really connect directly with these emerging platforms so that it doesn't require a customer integration or an installation by a guest.

So again, it's the common infrastructure that we're building. Obviously, this is an opportunity, like I said earlier in the Q&A session. I think it's an opportunity to increase that 60% proprietary channel contribution. But again, at 1% of your volume coming through LLM today, I'm not going to opine on whether or not that grows to 10% or 20% next year.

Your next question comes from the line of Meredith Jensen with HSBC.

I was hoping you might think a little bit about international growth, excluding Canada. And particularly as you were mentioning some of the SG&A was related to international. And I'm wondering if that's sort of to build infrastructure there for development and how we should think about that going forward and sort of the mix between direct and master franchise.

Sure. Thank you. So international, obviously, is going to continue to be part of our growth strategy going forward. What we talked about last quarter and we've talked about this historically as well, we're focused on the Americas, first and foremost, right? When you take a look at where direct franchising is a common practice, those are the markets that we're laser-focused on specifically in the Americas. There was a reason why we consolidated the ownership structure in Canada. Canada has been a really nice tailwind for us this year. So when you take a look at international holistically, revenue, we look at it on a GRR basis, revenue was up a little over 7% in Q3. It's up about 8% year-to-date. -- internationally, 4% currency neutral, so to speak, rooms are up 7%. And -- and so when all is said and done, EBITDA is still on track to be about $50 million, a little over $50 million this year, and we expect to see kind of that mid-single digits growth going forward. As it pertains to direct versus MFA, do you want to hit on some of that mix, Scott?

Sure. Yes. So on the direct versus MFA, we're about 45% of our rooms now are on the direct side and about 55% are MFAs. So that's been a material improvement, particularly with the acquisition of the Canadian joint venture last year. So moving in the right direction, making sure that's more revenue-intensive. We're really focused on the direct markets where we think we can compete and has a more robust franchising environment -- in terms of your question around SG&A, really, the growth in SG&A has been around the acquisition of Canada. So we did -- bought that in July 1 of last year. So we've now lapped the SG&A growth there. So just some small investments as we introduced our 22 brands up in the Canadian region versus the 8 that the original JV had. But I think the great news is with over 370 hotels, in Canada. We already have scale. And so there shouldn't be a lot of SG&A needed to accelerate growth up there.

Super clear. And last very quickly, just for modeling purposes. You noted on partnership services that there were some timing issues there. And so it would be sort of doubled up in the fourth quarter to reach sort of a target of low, I think the mid single digits or something like that. Is that kind of the pace we should think about going forward? I know there was a lot of procurement opportunities there. So I didn't know if that might be something we could look forward to higher growth in future years.

Yes, I do think there's an opportunity to grow that more in accelerated fashion going forward. We did have some timing of revenues that pushed this quarter into next quarter. And we're now projecting low to mid-single digit. But I think going forward, we're probably in the more mid-single-digit increase as a base. And as we continue to unlock more opportunities both in procurement and through monetizing the millions of customers that come through our hotels going forward, there's an opportunity to grow that even faster. But let's say, in a more long term, that mid-single digits is a good modeling assumption. .

Your final question comes from the line of Alex Brignall with Rothschild & Co.

Just one question on RevPAR. I get less interested in forward expectations because the visibility is so low. But obviously, in the last few weeks and months, the gap between sort of high-end RevPAR and the lower chain scale up in the U.S. has closed dramatically. I wonder if you could just help us to put some reasoning behind that, just to have a better understanding.

Sure. Thank you. I'll hit that one. And I think a lot of it has to do with just broader macro demand trends and whatnot. And I think simply put, the environment has become more constructive, right, especially with our consumer the growth, I think it's showing up in the growth. The growth is accelerating, right? 7% was our RevPAR in October. We're optimistic that Q4 is going to be stronger than Q3 was. And I think a lot of this has to do with the fact that we're just more optimistic about the mid-scale consumer.

Employment is holding up. Even at the lower end, you had stronger job reports wage growth, deposit levels are holding up, consumer spending is holding up. And so yes, I think you're seeing some of that C shape that we've been referring to here over the course of the last couple of months. But I think the most important trend that we're seeing is consumers still continue to prioritize travel, right?

So when you take a look on the leisure side, we're seeing the resilience there. It's showing up in the occupancy -- and then on the business side, a lot of that is really project-based workforce-related demand remaining resilient. So again, we're sitting in what I would classify right now is a little bit of a sweet spot in terms of where the demand drivers are coming from. So -- when you take a look at the broader macro, obviously, a nice setup for us, but we're going to continue to focus on what we can control. So this goes back to commercial investments, midweek, et cetera. But again, I would say that those are the top reasons as to why you're seeing the RevPAR, especially in our segments bounce back.

There are no further questions at this time. I will now turn the call back to Dom Dragisich for closing remarks.

Thank you, operator, and thanks, everyone, for joining us this morning. We look forward to speaking with you again in February when we report our fourth quarter results. Have a great day. .

This concludes today's call. Thank you for attending. You may now disconnect.

Welcome back, everybody. So now I have to make that tough transition from like weighing the rabbit hole on prediction markets to what's going on in the hotel space. But this is actually really exciting. So to my right is Dom Dragisich. Dom is President and Chief Executive Officer of Choice Hotels. But the real story here is that he was just appointed to this role within the last few weeks. So congratulations, Dom.

Thank you very much. I appreciate it. It's an honor to be here.

So we've had the chance to work together for a number of years in your prior life as CFO, and we kept touch even in between there. But I don't think everybody is quite as familiar with you.

So let's just walk through, if you wouldn't mind, a little bit of your background and bio because you don't trace all your roots back to the hotel industry either. And I'd love to just kind of walk through that and what's led up to to your current role?

I certainly have a diversified set of experiences, and I know we have a prior relationship. But first thing I want to do is just say week 2 on the job. So it's good to see everybody again. It's great to be back. I was the CFO of the company for about 7 years. So a lot of familiar faces in the room, really excited to see everybody and talk throughout the day.

But first off, honored by the Board's confidence in me with this appointment, really excited about leading the company through its next chapter of growth. And I think that's going to be the theme, just really laser focus on execution and growth. But to your point, Shaun, I am not new to the industry, spent a little bit of time at Marriott, but had a diversified set of experiences before I got to Choice, actually focused on finance, operations, strategy, also had a little bit of telecom experience. We share a little bit of a background there.

So I've been in the technology world for some time. But just before Choice, I actually was the CFO of a company called XO Communications, which was a unique opportunity. I actually was able to work directly with Carl Icahn and his team. It was a bit of a turnaround situation, turn around the company and had the opportunity to lead the company through its eventual acquisition by Verizon. And it was back in 2017, where I got the call from Choice to basically become the CFO. And at the time, the company was going through a bit of a transition period. Obviously, there were some white spaces that the company was entering, extended stay, growth in some of the more revenue-intense segments. And I had a front row seat to all of that. That was the reason I was brought into the company to really lead Choice through that phase of its growth. And we were very successful in doing that.

I obviously was instrumental in some of the inorganic things, so the acquisition of Radisson, WoodSpring, et cetera but also really helped lead the organic growth in terms of this revenue intense strategy, which is very much becoming a both-and, which we can certainly get into. But the reality is 7 years into the job, I was able to then really have a 360 view where I led the operations for the company, led the strategy of the company, led growth, development brands. So you name it, I've kind of done it here at Choice Hotels. And so it's really an honor to be in this role. And candidly, all of those experiences gave me a front row seat to effectively what is core to our model, and that's the franchisee, right?

At the end of the day, when the franchisee wins, we as a franchisor win. So everything that we're focused on is the unit economics for our franchisee. And candidly, when they're growing, we're growing. And I'm really proud of the growth under the leadership team that I've actually had the honor of working with. When I joined the company back in 2017, we were a $295 million adjusted EBITDA business. Today, the guidance that we issued in Q2 implied about a $643 million adjusted EBITDA business. So pretty tremendous growth over a 9-year period of time. Just really excited to lead the company during this next phase of growth.

So when we think about presidents or executives, we always think about that first 100 days, right? And you said it yourself, you're first 2 weeks in. So what does that first 100 days look like for you? I mean, because you are coming from that internal seat, it's not like you don't know what some of the priorities of the business are, but you now have the ability to start to put some of your plans into action. So give us a little bit of a teaser of like what are some of your first initial things that you're working on?

Sure. First thing I'd say is the core of who we are as a company, that's not changing. There is going to be a little bit of a returning to our roots theme that you're probably going to hear throughout this conversation. But really, it comes down to that franchising business model. It's really being that asset-light franchisor. And again, when our franchisees win, we win. And so laser focused on unit level economics for our franchisees and really leveraging what we classify as a best-in-class conversion engine.

And really, that has been the catalyst for our growth this year. And in the supply-constrained environment, we see that continuing to be the catalyst for our growth in the foreseeable future. But when you think about -- and I'll just kind of peek behind the curtain a little bit, what I've told our associates internally, I'm laser-focused on 3 things. And you're going to see kind of a maniacal focus on execution, which is mission-critical, but there's really 3 buckets. It's culture, it's execution and it's long-term strategy. And so as it pertains to the culture, really bringing in a sense of urgency in the role that I'm sitting in today a renewed energy.

I think you heard it on the Q2 call, a transparent approach, frankly. I think it's really important to own where we may be falling short and to really lean in where our strengths are. And so that's my commitment to the investor community. That's my commitment to you as an analyst to continue to have that transparency in the sense of urgency.

I think from an execution perspective, there's really 3 priorities. And that's my #1 priority is net rooms growth. And specifically in the U.S., our investors have asked for this time and time again, we are delivering momentum in that category, and we're going to continue to do so. I've already talked about unit level economics. And the third really is doing all this in a capital-light fashion. And I think throughout my tenure, we've actually put the balance sheet to work for acquisitions, for development and whatnot, but you're actually seeing us becoming a net recycler of that capital. So that's going to continue to be a huge focus for me and really returning to our roots from a capital-light perspective.

And then the last bucket, like I said, it's really around the long-term strategy. And I think the bridge there is a lot of what you heard on the Q2 call as well. It's really our commercial engine. I think that this is an area where we've really leaned in on the investments that we've made over the last 2 years just with regards to a guest data platform, an RFP tool, a new loyalty program, a loyalty tool itself. A few things we'll probably talk about throughout the day today, but that really is the bridge in terms of us becoming a much more consumer-centric organization that is really AI-enabled. I think we can't have a conversation without talking AI, but I won't get into that just yet. But it's on the list. Great.

But really, as you think about that evolution, where we've really fallen a little bit short, frankly, it's relative RevPAR performance. And so the investments that we've made over the last 2 years are really going to help us fuel the growth in the future in terms of heads and beds in that same-store sales growth. And so we're feeling good about where we are. Those are going to continue to be my top 3 priorities, and I'm really excited about the opportunities ahead.

So we've talked about, I think, 2 variables in particular, and so we may have already touched on this, but let's go that layer deeper. When we think about the investment community, these are algorithmic businesses as we've discussed plenty, and they're not that hard, right? We've got RevPAR and same-store growth. We've got rooms growth. We've got royalty rate. We've got an ancillary fee bucket because it has become more important to the industry. Which of the KPIs, though, do we want to associate with you right now, kind of like when we're looking back and we're like, we've talked about net rooms and a little bit falling behind on RevPAR. RevPAR is harder to be a controllable. So like let's -- which one or both those North Stars, what's going to be the North Star for your leadership?

Yes. I think you hit the nail on the head. It's a very simple business model. Obviously, over the last couple of years, there's been a little bit of noise with regards to the acquisitions and like I said, the development and whatnot. At the end of the day, my #1 priority is net rooms growth. And so the algorithm is simple. It's net rooms growth, RevPAR, effective royalty rate, those non-RevPAR fees, the ancillaries and then our international growth, which is about $50 million in terms of international. So that can continue to be a driver for the business. But I said them in order, right? My #1 priority continues to be net rooms growth. We're very encouraged by the progress that we're making. You continue to see sequential improvements, and you saw global rooms growth really accelerate in Q2.

The U.S., in particular, is much more revenue intense, so to speak. And so from that perspective, my focus is really around just getting that U.S. rooms growth back to positive. We're feeling very good about the fact that openings were up about 30% in Q2. The development environment with franchise agreements were up about 30%. We're opening these hotels faster.

The role that I was in even prior to the CEO seat, that's where my focus was. It was really on that operational variable. I think from a RevPAR perspective, you're right. You can't control the broader macro, but you can control really maintaining your fair share. And that's really where those commercial investments that we've made will allow us to get back to our fair share. And obviously, the goal is not just to get to fair share, but it's to eventually take share.

And so RevPAR is the second key factor. And then effective royalty rate as you continue to drive franchisee profitability, revenue, lower costs and then obviously give them better tools. The effective royalty rate is the willingness to pay from our franchisees increases. And so you have seen that as a tailwind for us, 7 to 9 basis points is what we guided to for the year. And so those are -- those 3 metrics are the core revenue metrics and then obviously, the ancillaries and international growth. And we'll continue to provide transparency on that international line item as well.

So let's talk about this net rooms growth kind of turnaround, right? If that's going to be the North Star. And I think it's really important for Choice. There was a period in there, and this is where you and I were interacting quite a bit actually was around the revenue intense net unit growth strategy. And that was a hard one for Wall Street, right? We didn't have a major problem with it because analytically, we found that sort of everything you were doing actually backed up. But the bottom line was that aggregate room count was declining for Choice for a period of probably close to 2 years, while you were turning out some lower value units and you were bringing in higher value ones where you were able to even replace maybe catchment areas or AOPs with brands that you would have liked to have had there, but you couldn't before.

But that's also been rolled off for probably more than a year, probably closer to 2 at this point. So what's been driving the turnaround that you saw in the second quarter? Because I think what's kind of gotten us back to a little glimmer of growth? And again, appreciating that there's plenty of white space or room to maybe improve that metric further. But walk us through the journey of where were we with the RING strategy and then kind of where do you think we are right now? What's driven that change?

Yes. So the RING strategy, revenue intense unit growth is kind of where we were 3, 4, 5 years ago and continue to be today. And so the product that we're bringing into the system continues to be a higher revenue per unit. So you're seeing more product in mid-scale, upper mid-scale, extended stay, upscale and less product coming in economy, specifically economy transient. So that's going to continue to be an important driver for earnings growth for years to come.

The reality is we're over the biggest kind of what I would call the kind of the cliff of termination, so to speak, as it pertains to exiting some of that underperforming product out of the portfolio, lower quality, which has really been a nice tailwind for just the overall portfolio for us as well in terms of guest reviews and those types of things. And so we made the best decision for the time in terms of really turning around the Comfort brand, really leaning in on that revenue-intense strategy. But where we are today, there's no reason why this can't be a both-and.

And that's really as it pertains to that franchisee success system that I think is the leading franchisee success system in the industry. We have a right to win in economy and lower mid-scale as well. So yes, we want to bring in higher-quality product, but that's really where you're seeing the focus. That's where you've seen kind of my focus over the last 2 years in that operational, like I said, and there's 2 sides of that, right?

The net rooms growth has been driven by openings. Like I said, openings in Q2 were up about 30%. All of that has really been driven by 2 factors: the conversion engine and then on the new construction side, extended stay. Those have really been the bread and butter. 90% of our openings this year are expected to be conversions. We have a proven conversion engine. And the flip side of it is you've actually seen terminations significantly decline year-over-year. We're focusing people, process and systems on this. Obviously, like I said, we got over the biggest cliff.

But the reality is our exits are down about 50% year-over-year as well. So you can do the math. Obviously, that's going to be a nice tailwind for us. It actually led to our increasing our net rooms growth guidance for the year as well. And just given the concentration of our portfolio in the U.S., that implies that we were increasing our U.S. rooms growth guidance as well.

I think the retention metric in particular, we do see just natural levels of higher churn at the lower -- as we kind of move down the chain scale ladder a little bit. But it's a hard one for us on Wall Street to pin down. So it seems like some of the work you've been doing has been behind the scenes we may just starting to see a little bit of the fruit there.

But can you help us unpack or how would we gain confidence in this moving forward? Meaning, have we taken a brand-by-brand approach where we kind of called what we needed to cull and we're going to see that kind of move through? Again, we know the comfort initiative, but maybe since then, it hasn't been as clear. What's the right way to just gauge and make sure that what we're not seeing is the one place where it would be dangerous would be if we saw a change in brand standards just to keep -- just move the pendulum just to allow more to stay in the system for longer.

I couldn't agree with you more, and this is where kind of the both-and strategy comes into play because we need to continue to be revenue intense, but at the same time, we have the right to win with Econo Lodge, with Rodeway, some of our lower mid-scale brands as well. And so we're going to continue to do that, right? And I think what it comes down to, it goes back to, again, unit level economics. If you're performing and your franchisees are making money, they're staying in your system.

And so we have obviously continued to drive profitability at the lower end of the chain scales as well with some of the programs and the tools and everything that we're rolling out to the select service lower mid-scale and economy players as well as up the chain scale. So that has been one of the reasons why you've seen that. The other is we've lapped a few of those initiatives that we talked about, the Comfort cleanup. So we're back to kind of standard termination rates with the Comfort brand, which obviously is our largest brand and our biggest revenue contributor. So that's no longer going to be a headwind.

But really, this comes down to also just the way that we operate operationally, right? And so what we were able to do is put, like I said, our best people. We've got systems and we've got the data to allow us to get in front of that owner sooner, right? If you see an expiration coming up or if you see a window coming up, what is it that we have to do to ensure that they're satisfied? What is it that we have to do in terms of being able to retain them in our system, not at all cost right? But at the same time, making sure that we have that relationship, and we're getting in front of it.

The reality is when you take a look at the termination side, we expected and this is what we guided to about a 250 basis point improvement in our retention rate this year. What that reflects is back to effectively where we were historically. So I think that we had a little bit of a wave of terminations over the last 2, 3, 4 years. But now what you're starting to see, again, a return to where we were historically, and we believe that we're going to be able to sustain that churn rate in the foreseeable future.

So walk us through then the medium to long term. We're going to -- we'll put this comfortably under the -- not guidance, but what would be the aspirational goal or possibility of where net rooms growth could get to? And like again, this is going to be something that's going to move over time. I can't just keep you staring [indiscernible] what's about to be said. But yes, just help us steer the boat here a little bit. I mean we -- the background is we know what the industry is achieving. We know what all the peers are doing. These are all publicly traded companies. And so we know the metrics that are out there. But what's reasonable for choice acknowledging that your churn rates are yours and your brands may be at a different part of your life cycle.

Yes. I mean, I'm not going to issue any sort of guidance, [indiscernible], so don't worry about that. But when you take a look at just the algo, I mean, what I'll talk about is historically speaking, this is a business that's grown 2%, 3%, 4% from a net rooms growth perspective. Obviously, the revenue intense strategy doesn't necessarily require us to get back to 4% plus or whatever it might be. But when you take a look at the implied guidance for this year, 1.5% is effectively what we guided. We talked about in Q2, we felt very good about where we were, and that's the reason why we raised the guidance.

So again, we expect to see -- you saw sequential improvement from Q4 to Q1. You saw sequential improvement from Q1 to Q2. We expect to continue to see sequential improvement. And candidly, we believe that there's momentum in the business to certainly sustain that. And ideally, you would get back to those historical rates over the mid-to-long term.

Great. And you brought up a few times, and I think it's super important, the dynamic around franchisee health sort of so goes the franchisee, that retention rate is going to move very naturally with if they're having a great experience, they're going to stay in the system for longer, right, which is sort of the output of the function. This is actually -- this topic has become a bigger topic across the broad industry. So it's been a little less so at your chain scale, but I imagine it's being held across the industry.

The truth is we know what owners have been up against, right? There was a very low ADR inflation environment, '17 and '19. There was COVID where it was just pure survival and then maybe a quick hockey stick ramp, but after that, sustained levels of high unit cost inflation, which just makes it hard, right? It's hard to grow revenues faster than costs. Put all that together, and franchisees are feeling it after 8, 9, 10 years of mostly headwind. So what can you do on that side to kind of return back to them some of those things? What are they asking for? And what do you -- walk us through a couple of the initiatives that you're starting to feel good about that are helping franchisees at that most basic level of saying, look, choice, we're paying you like here's what we wanted to see on our margins to make this a symbiotic relationship.

Yes. So it certainly has been a headline, especially as of late. It all comes back to -- you've got to look at it as a basket of goods, a basket of services that you're provided and ultimately, the overall franchisee profitability. That's where it starts. And so at the end of the day, fees, et cetera, are one component of that. I'm not going to sugarcoat it. The franchisees are pinched right now. Insurance, labor, property taxes, interest rates, the cost of financing has certainly increased over the last couple of years as well.

And so everything that we're doing, and this is a company that has an 85-year history working hand-in-hand with small business owners. And I think that's where it starts, right? And how do you ensure that you're giving the franchisee what it is that they need to run a profitable business. And so we think about it, there's 3 levers. Again, very simple business model. We're driving top line revenue. And so all the things that I talked about from a commercial perspective, that's the key there is making sure that we're continuing to gain share in that regard.

We're lowering their costs, and then we're giving them tools to operate their businesses more efficiently. And we can certainly talk about each of the 3. But it's not just about the cost to operate as well. It's the cost to enter the system. And so a lot of what we've been focused on is how do we ensure that we're driving our FF&E cost down? How do we ensure that we're driving cost to convert, cost to build. And so what you've seen is several initiatives that we've led over the last couple of years that has driven our prototype costs down by about 25%. You've actually seen FF&E reduced by about 20% as well. A lot of the headlines is really around fee relief, right? And so this isn't something new to Choice.

Interestingly enough, for the last several years, not last quarter, a couple of quarters, we have actually tied fee reductions to guest review scores from a loyalty cost perspective, from an overall fees perspective as well, especially in the lower end of the chain scales where they are particularly pinched just given the pressure on ADR as well.

So again, this is a holistic view of that franchisee profitability, and we're not new to this game. It's been 85 years, and we're really proud of where our franchisees are. Granted, there's still some headwinds. And frankly, supply is going to be less than 1%. So a lot of this is really centered around the cost to convert more so than the cost to build. And the faster we can get those owners cash flowing, the better it's going to be. So a lot of our focus has also been on accelerating the time from signing to getting that franchise open. And so we've actually been able to compress that by about a month as well, which has also been net favorable to the cash flow of a lot of these owners that are ramping.

And you mentioned fee relief, which is, again, it's one component of a complex matrix of what an owner is working through, but it's an important one, right, when they are looking at their P&L and scrutinizing every line item more than they arguably ever have, right? Can you help us put it in perspective? Again, some of these initiatives sound like they've been in place. It is not new that what you're doing. But what's kind of in play here? Because this is something that is becoming a little bit more of a discussion point across the industry, whether it's directional magnitude or kind of like what are you able to do in incent?

And then how are you able to fund it, right? Is it really just efficiencies through some of the system fund and some of the different kind of fees that they're paying external, obviously, to the royalty rate that are ultimately being charged?

Well, so I think broadly speaking, when you think about the model, all-in fees for any franchisor is 10% when you think about the royalty rate and the system fund. I think the one that has gotten the most attention lately has been on the loyalty side, right? And so we've talked about a lot of the brand companies talking about loyalty in terms of who ultimately wins. And ultimately, if it's driving heads and beds, that's the goal here is really driving that top line. But that's where one of the focus areas has always been for Choice Hotels. But we want to tie that relief to an outcome.

And to me, it's not just giving relief for the sake of relief. If you drive a certain guest review score above a threshold, which obviously is the most closely correlated metric to RevPAR index, we're going to give you some relief because why? We're going to be able to make it up basically and both of the parties win, the franchisee and the franchisor.

So again, that's one of the areas where you've seen the fee relief. The other is just, like I said, in the economy segment in particular, where, obviously, if they have an LTR score above a certain amount, which is our likelihood to recommend score, we would give that relief as well. So you'll see that come off of that overall 10%. It's a smaller component of it, but the reality is it goes back to do you have the ability to drive other SG&A down for that franchisee as well from an automation perspective, et cetera.

So broadly speaking, because of the rising cost and some of the other P&L items, the franchisee fee has become a smaller percentage of the overall cost picture. So the key here is how do we actually go target reducing their cost to operate through those other P&L items.

We'll come back to that in a minute, but I want to -- like one last area on sort of the rooms development picture is we've started to hear some competitive buzz about just more investment spending in the landscape, more key money that's being commanded potentially like lower chain scale and price points, right?

I think all of this is a pretty natural outgrowth of 4, 5 years now straight of materially below long-term average supply growth. So we're all competing over a smaller and smaller pie and all looking for ways to get kind of involved in that. What's your perspective just on the topic overall? Are you seeing that money trickle down to your price point? And then you're in a very different phase of where you might be on key money, which is you put a lot into some new brands and starting to actually maybe recycle a piece of that.

So talk about those 2 different balancing. What are you seeing in the industry? And then kind of how is this translating to Choice's kind of budgeting and thought process?

Absolutely. And there's 2 different classifications of capital there, one of which is key money, one of which is development capital, which I'll get into. And I'll start with the key money side of the house. You've heard that a lot lately in terms of especially in the mid-scale space that larger competitors are coming in with key money. When you take a look at our key money this year, the reality is it's been pretty consistent on a per deal basis. The reason why in Q2, we talked about possibly a $10 million, $15 million, $20 million increase in our key money is the momentum that we've seen on the opening side.

And so every deal that we underwrite is actually underwritten to a specific payback, a specific IRR, et cetera. We have not seen those payback periods lengthen, and we have not seen those IRRs come down. So we're still feeling really good about the unit economics of each of the deals even when we're putting key money out there. It's a very capital-efficient way to continue to grow. And like I said, on a per deal basis, we've seen that fairly consistent even with the competitive pressures.

Again, it goes back to the unit level economics for the franchisee. And so again, as you continue to bring in more revenue-intense product and as you see momentum in terms of the volume, you may see elevated key money cumulatively speaking, but that's a good news story for us because that means that unit growth has picked up.

On the development side of the house, there were 2 brands in particular, Cambria and Everhome that we were putting our balance sheet to work on. And that was really to get those brands to scale. We were putting shovels in the ground ourselves. Cambria is now at 75. Everhome, we have 30 units that are open, one of the fastest-growing mid-scale extended-stay brands in the industry. And so we're beyond that now.

You're going to see a significant transition from a capital deployer to a capital recycler. And to put this in perspective, we've got about $650 million of capital out there to be recycled on our balance sheet today. Our leverage ratio is still 3.1x as of Q2. And so when you think about all of those puts and takes, you're seeing a transition back to the franchise business model. We're going to be a capital recycler. We're going to be able to deploy $450 million to $650 million of capital to more growth initiatives organically, returning capital to our shareholders.

We believe that our stock is trading at a low multiple right now, and we issued guidance that we were going to repurchase $200 million of shares, first time in my 10 years where we issued share repurchase guidance to the Street. And so again, this is all part of, again, returning back to those roots, Shaun.

I mean the $650 million is a big number, to your point, that's a full turn of leverage on the business, would you comfortably below plenty long-term averages, IG thresholds, anything you need to think about. Give us a generic time horizon. I mean, again, some of these are going to be lumpier deals. There probably multiyear contracts roll up. But what's kind of the right time frame to start to target a bucket of that opportunity?

Listen, we're not going to hold ourselves to an arbitrary time line because at the end of the day, if we have the ability to get a higher value for some of these assets and if it's net positive for our investors, that's what we're going to do. So I'll start with that. We did say that we believe the first wave is probably going to be in the first half of 2027. We talked about that publicly on the Q2 call. So there's a couple of assets in particular that we can see recycling as early as first half of 2027.

And again, it comes back to if the value is right, if the timing is right and it's net positive and accretive for our shareholders, we're going to do that. But again, we are not in the -- we're sitting comfortably within our leverage ratios, to your point, 3x to 4x is what we've kind of targeted. But the reality here is this is a value-maximizing opportunity for us and ensuring that you retain the flag in the long term as well.

And I believe there's still a couple of chunkier owned assets on the balance sheet as well. These are things that were acquired largely through acquisition. Where do those stand? I mean, is that part of that bucket? And because I mean, that could have sort of the tangential benefit of it should improve like even small owned and leased assets have a big impact on sort of consolidated financials when it comes to a company of choice?

That's right. That's right. And the answer is the $650 million is inclusive of those. So it was Cambria, Everhome, which we were developing ourselves. And then we actually purchased 3 assets as part of the overall Radisson Americas acquisition. Those assets are part of that. And candidly, we believe that we're going to be recycling those kind of in the same time frames that we've talked about for the broader real estate portfolio.

So again, part of the $650 million overall that we'll be able to continue to deploy both for value-accretive growth initiatives and returning capital to shareholders.

So let's talk about the sort of -- we've hit on multiple layers. Let's go back to the demand environment now. We've touched on net rooms growth. This has been a hard one for us to pinpoint, right? The truth is, right, for the balance of last year, we saw a much bigger gap between high and low between sort of the natural state of how we'd expect to see economic growth translate to the hotel industry than we typically see.

It feels like really since maybe even only early summer, I mean, it came a little later in the lower-end chain scales than it did in others. But it feels like we're starting to see some signs of things, convergence might be an aggressive word depending upon how nerdy you are. But yes, like I think we've rebranded it K-shape. Is it C-shape?It convergence, whatever we want to call it. But the vernacular side, what are we seeing? Are we starting to see those things kind of balance out? Because it feels like it was relatively recent, really maybe even as recently as June that we're starting to see some of those fundamentals improve on the lower end side that is super encouraging.

Yes. No, I think that's absolutely right. And the headline, I think, is the macro backdrop is improving, especially for our consumer, a more value-oriented consumer in our spaces. We're seeing it in terms of the momentum that we talked about, which I can hit on a little bit more whether it's in this question or later. But the reality is, I think to your point, we've used every single letter. I think Chris actually went out publicly with the C-shaped economy, and I think it's -- there's a lot of momentum behind that particular letter right now. And I'm not going to get into a debate around just the macro in terms of geopolitical and gas prices, which has not been an issue for us, and we can certainly talk about that one as well.

But when you take a look at the fundamentals, wages are increasing even at the low levels. You're seeing job growth is remaining resilient and consumer spending is resilient. And so I think when you take a look at all those factors, you're seeing that show up in results. And a lot of it comes to a lot of different demand drivers for us. All of it is underpinned by that value orientation, right?

When you think about project-based business travel as well as more value-driven leisure travel, I think a lot of that is showing up in the RevPAR results that we saw. We saw a pretty dramatic step-up in RevPAR in Q2. We did say that our July RevPAR was going to be about 100 basis points higher than our June RevPAR. And I'm not going to sit here and talk about guidance at this point, but that's what we said in the Q2 call. And we also said that our Q3 RevPAR was actually going to be much higher or at least higher than Q2.

And so again, we're seeing that momentum, and we're seeing that sequential improvement, which I think to your point is sometime in that May-ish time frame, you started to see a bit more of that convergence at the low end. And I think you're also possibly seeing some trade down, right? And I think there's a couple of economic reports that are out there that's talking about even the higher net worth households are starting to trade down and look for more value because people are spending so much at these higher-end properties. The higher end is still holding up, and it's going to continue to hold up, but we are starting to see a bit of that convergence.

And just for the skeptic out there, they're going to say, "Oh, but easy comps, right? And yes, on a 2-year stack basis, some of these chain scales, particularly as we drift down towards the lower end of the economy are still relatively weak. But what gives you some confidence that this is stickier. We've already had some conversations up here today. And I believe that is the sort of the belief across the industry is that this is bigger, this feels more like a cycle and something more macro and that maybe last year was more than a natural state of affairs. But what are you looking at to sort of provide some of that confidence?

This one feels certainly feels a little more sustainable, frankly. And so yes, there were some easier comps or some tailwinds, I would say, that were baked in Q2. You had the World Cup demand. You had the Americas 250 events, some urban centers had some tailwinds as well. But what gives me confidence is that continued sequential improvement, right? And we, as a company, actually had some tougher comps in the first half of the year.

I promised Scott Oaksmith that I wouldn't say the word hurricane. But the reality is there were some tougher comps for us. And we're beyond that. And we're beyond candidly, the easier comps in Q2, but we still stood behind the fact that July, 100 basis points better than June, Q3 better than Q2. And so again, that sequential improvement that we're seeing tells me that it's sustainable.

Now again, I'm not going to be able to control the macro, but what we are going to be able to control is getting our fair share, right? And so kind of going back to the beginning of the conversation, it's those commercial tools that we talked about that can really drive heads and beds that can really allow us to capture our fair share. So there's demand that was always out there that we were entitled to. We just didn't have the tools to actually go get that demand. Now we do, especially on the business side of the house.

Well, maybe that's a little bit of a good kind of transformation in either ancillary or technology or both. So I'll let you kind of maybe...

Choice. We had...

Maybe choose a direction for us. Let's talk technology, right? I think AI is obviously the buzzword, but just walk us through -- you just -- let's zoom way out. Just give us a quick overview of the technology stack. I think we go a number of years back and actually too on the very cutting edge of some of the cloud-based technology, but now we're talking 8 to 10 years ago.

So give us a little bit of update or fill us in, what are the capabilities today? Are there things that you're rolling out that you need another layer of technology before you can get in? Because look, hotel chains are notoriously tough, right? We've got reservation systems, property management systems, third-party software. It doesn't all talk to each other, right? And so what's the state of choice today? And then help us kind of -- then we can use that as a jumping in place.

Absolutely. So I'll start with our technology stack. We believe that this is a structural advantage for us. I'll start there. For those of you who might not know, we actually have a homegrown central reservation system that was native built to the Amazon Web Services. We have a property management system that was homegrown and native to the cloud as well. And so our 2 primary systems were built native to the cloud.

Our entire technology stack is now sitting in the cloud, right? And so we were the very first company that put end-to-end our technology stack in the cloud. That has been really important for us in this AI-driven world that we're going to continue to be living in, and it's going to continue to evolve. And so to me, that's a structural advantage. Now as it pertains to how we think about just AI technology, et cetera, going forward. What's critical, it's the data, right? It's the data that underpins all of this. And I'm not going to sit up here and geek out on data nodes or anything else.

But if you think about the data, the semantic layer, it ultimately allows you to go deploy technology in 3 ways, right? We look at our AI strategy in 3 different buckets. The first is how does the guest ultimately find you? And what is the guest journey? How does a franchisee use a tool as a teammate? And then how does an employee become more productive, right? And so the data that underpins that allows you to go deploy all of those tools as effectively and as quickly as possible. And so we think that, that's going to continue to be a huge differentiator for us. And we're not just talking the talk. I mean when you take a look at what we've shared publicly, our property management system now has a teammate that's embedded within it. It's called CHARLIE.

And the reality is that teammate can now reduce operational requests. We're seeing it show up about 40% reduction in operational requests. We're actually seeing the time of a shift reduced by about 50% in terms of the activities that those shift workers were executing on. And so we're seeing that show up. We saw it show up in a tool that we deployed that was effectively an RFP response tool. It's now automated. So if you think about mom-and-pop owner operator who is not just overseeing the hotel, but they're running the hotel on a day-to-day basis, they never had the opportunity to go respond to some of these RFPs.

We now have an AI tool that can do that for them. And we're seeing it show up in -- I think it was a 360 basis point improvement in the conversion rates. Early innings, but these are the types of things that you're seeing. And then I think everyone talks about the guest journey. And again, it comes down to content creation, content curation. Websites were developed for the human eye, not for LLMs. And so as you're thinking about kind of all this infrastructure coming together and the data that we have, it allows us to really hit on the guest. It allows us to hit on the franchisee and our every -- at Choice, we talk about every associate really being a builder.

And let's just talk distribution for a minute because particularly for these chain scales, right, and as we lean more leisure, that's where some of that mixture of distribution channel can matter, right? And I think you've done a very good job of obviously increasing your proprietary share, but how much of the kind of overall revenue distribution you're delivering for your franchisees. But give us an update on sort of where you're at and then what maybe the next move could be of where AI could start to impact that mix even further that you can capture more direct and less to OTA and other places?

Yes. So distribution is changing. It's changing rapidly. I won't pretend to tell you where it's going to be 5 years from now. But when you think about just where we are today, the key is being discoverable, being discoverable and being bookable. And all of that is underpinned by, again, content curation, content creation. So a lot of what we're doing right now is ensuring the clean data that we have is set up in a way that's servable to the LLMs and whatnot because now I can actually log into my LLM of choice and say, it's very natural language conversational. I want to now take a trip to X,Y, Z. I've got 4 children. This is my occasion. So you're going to see a shift from persona-based to occasion-based marketing, I think. And a lot of that comes down to the data.

So we've really doubled, tripled and quadrupled down on ensuring that we've got the data right that we're basically serving it up in such a way that we're always on that shelf regardless of the LLM that you choose. It's going to be a continued evolution, but that's where we're focused. There's some headlines that you heard just with regards to Google AI Mode. We were an early adopter there that effectively allows a customer to start a search in Google and essentially have a conversation and then ultimately book using Google Pay without ever leaving that sort of environment because that's about a frictionless experience. And I think that's really what AI is creating is just the need for frictionless experiences for our guests, for our owners and for our associates.

And Google is one channel. We've got a lot of the other big LLM companies. Do we have direct connectors in place with some of those? Are those on the shelf being rolled out? It does take -- you've got the -- you've got the raw tech stack to be able to do it, but you need that MCP layer not to totally geek out, but that will be my one AI name drop. But just yes, I mean, are these in place? I mean if I open up Claude, how long is it going to take me to get to see a Choice connector where I'm going to able -- really able to tap into and actually see the inventory.

Stay tuned for all of that. But the reality is we've been prioritizing where we're going to lean in. I think Google AI mode was one area in particular just because of the direct connection that it does have and a frictionless experience. But all the capabilities that you hear in the marketplace with regards to ChatGPT app, et cetera, we have the capability to do that right now as well. So stay tuned on that one and more to come because it's certainly going to be a part of the future going forward.

Perfect. Unfortunately, we're out of time. But Dom, congratulations on the new seat. Best wishes as you start to ramp up in the fall, and thanks for spending time with us so early in your tenure. Really appreciate it.

Really appreciate it as well. Thanks, everyone.

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Second Quarter 2026 Earnings Call. [Operator Instructions] I will now turn the call over to Allie Summers, Senior Director of Investor Relations.

Good morning, and thank you for joining us. Before we begin, please note that today's discussion includes forward-looking statements as defined under U.S. securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information, please refer to our filings with the SEC, including our most recent Forms 10-K and 10-Q. These statements speak only as of today, and we undertake no obligation to update them.

A reconciliation of any non-GAAP financial measures used in today's remarks is included in our earnings press release available in the Investor Relations section of choicehotels.com. Joining me this morning are Dom Dragisich, our Interim Chief Executive Officer; and Scott Oaksmith, our Chief Financial Officer. Dom will discuss our business performance and strategic progress, and Scott will review our financial results and outlook. And with that, I'll turn the call over to Dom.

Thank you, Allie, and good morning, everyone. The second quarter marked encouraging progress across our key priorities, highlighted by a 6% year-over-year increase in adjusted EBITDA. Most importantly, U.S. net rooms growth improved sequentially for the second consecutive quarter and is now nearly flat year-over-year. This reflects our strongest first half performance since 2021. These improving net rooms growth trends in the U.S. and continued international momentum led to global rooms growth of 2.6% in the second quarter. We also continued to drive strong franchise agreement results during the quarter, reinforcing our confidence in future global and U.S. rooms growth.

U.S. RevPAR increased 1.3% year-over-year, reflecting strengthening demand trends and benefiting in part from the FIFA World Cup. The RevPAR improvement we saw during the second quarter, together with the trends since quarter end, show we are moving in the right direction. I am confident this business can perform at an even higher level as we continue to realize greater value from the investments we've made in our commercial engine and technology platform while maintaining a renewed focus on execution. Disciplined capital allocation also remains a key priority for Choice.

In the first half of the year, capital outlays for hotel development declined 80% year-over-year as we continued our transition back to a pure-play asset-light franchising model while maintaining flexibility to make targeted investments in attractive franchise growth opportunities. There is still more work to do, but the progress we have made this quarter and the underlying operating trends we're seeing give us greater confidence in the outlook for the balance of the year.

As a result, we're raising our full year outlook across several metrics, including adjusted EBITDA, U.S. and global RevPAR, U.S. royalty rate and global net rooms growth, which Scott will cover shortly. Now before I go into the quarter in more detail, I'd like to briefly share how I'm approaching this role. My focus is simple: execution. We have a meaningful opportunity to improve, and my job is to close the gap between where we are today and where I believe this business can perform.

Since stepping in, I spent most of my time listening to our franchisees and teams across the company. Those conversations have reinforced 3 priorities for me. Staying close to our franchisees and the guests they serve, moving with greater urgency across the business and being disciplined about where we invest our time and capital.

Years of working across the business have given me firsthand insight into our strengths, where we can perform at a higher level and where better execution will make the biggest difference. What's needed now is greater speed, discipline and accountability to deliver stronger results for our franchisees and shareholders. Over the past several years, we've invested in building a stronger commercial engine and technology platform.

Today, I believe our biggest opportunity is realizing the full potential of what we've already built, turning those investments into stronger operating performance, improved franchisee profitability, better guest experience and ultimately greater long-term shareholder value. We'll be candid about where we're making progress and where we still have work to do. Ultimately, you'll measure us by the results we deliver, and that's the standard I hold us to.

The way we'll achieve those results is by executing a business model that creates value for our franchisees and in turn, our shareholders. At Choice, we strengthen franchisee economics by lowering owners' costs and delivering higher RevPAR through our commercial capabilities. Stronger franchisee economics support rooms growth and in turn, more durable earnings and free cash flow. That gives us the flexibility to invest in the business while continuing to return capital to shareholders. My job is making sure we deliver on that consistently.

In my conversations with franchisees, one message comes through consistently, they want a partner that lowers their costs, increases their revenue and helps them operate more effectively. Technology has been helping us deliver on each of those priorities, building on several years of investment in our commercial engine and cloud platform. More recently, AI has helped us move even faster. On costs, we've reduced prototype costs by up to 25% across key mid-scale brands. Country Inn & Suites by Radisson is a good example.

The redesigned lower-cost prototype is driving renewed development momentum with franchise agreements up 11% year-over-year in the first half of 2026. We're also leveraging the scale of the Choice system to lower owners' ongoing cost through a new FF&E procurement program, which is expected to reduce cost up to an average of 20% across the program's FF&E and building product categories. On revenue, demand is strengthening, and I believe our biggest opportunity is earning a greater share of that demand by leveraging the commercial and technology investments we've made, particularly among our core value-oriented travelers.

Earlier this year, we relaunched Choice Privileges to better serve that traveler by making our loyalty program more rewarding and better aligned with how our members travel. While it's still early, we're seeing encouraging signs. Membership grew 7% year-over-year to 77 million, while loyalty contribution increased more than 250 basis points during the quarter. Importantly, members acquired since the relaunch are already generating higher average revenue than comparable members acquired a year ago.

We are also seeing early traction from our recently launched Business Direct platform for small- and medium-sized businesses. Approximately 60% of enrolled businesses are new to Choice and nearly 90% of room nights occur midweek. More broadly, revenue from small- and medium-sized business travelers increased 8% year-over-year in the second quarter.

I mentioned AI allowing us to move faster, but we are also using AI to deliver tangible benefits for our franchisees. Our AI-enabled EasyBid platform improved group RFP conversion by 360 basis points, contributing to 16% year-over-year growth in group revenue in the second quarter. Inside the hotel, our AI teammate, Charlie, within our property management system reduced requests for operational support by about 40% in an early pilot, freeing up staff to spend more time with guests.

And there is more ahead in how AI reshapes hotel discovery and booking. We're continuing to refine our content and data, so Choice properties are discoverable and desirable wherever guests are searching next, and we're working directly with the major AI platforms shaping that shift. It's early, but we intend to be ahead of that curve. I believe technology and AI are becoming the engine that powers everything we do, not as separate initiatives, but as capabilities embedded across every part of the business. That's how we create more value for our franchisees and ultimately, our shareholders.

Turning to RevPAR. The demand environment was constructive, supported by our value-oriented brands, resilient workforce-related travel and our extended-stay portfolio. We also benefited from major event-driven travel over the past 2 months, including the FIFA World Cup. Importantly, the World Cup brought in a meaningful number of first-time Choice guests and international travelers, expanding our reach into segments where we have historically been underrepresented.

While the demand environment was constructive, our objective is not to rely on market tailwinds alone. We are focused on improving our competitive RevPAR performance by earning a greater share of demand through the commercial capabilities we've built and will continue to strengthen. That's how we'll deliver more consistent performance over time. Net rooms growth remains my top operating priority. U.S. net rooms growth improved sequentially as second quarter openings reached a 7-year high, while exits declined to their lowest level in 6 years.

The decline in exits reflects the growing value we're delivering to our franchisees through the Choice system, along with stronger franchisee engagement and improving owner economics. Our conversion-led development model continues to differentiate Choice through faster openings, lower owner investment requirements and earlier royalty generation. That advantage was evident again this quarter as our U.S. conversion pipeline expanded 6% sequentially.

Importantly, about 75% of the U.S. agreements we've signed year-to-date are expected to open this year, providing strong visibility into near-term growth. International net rooms continue to grow in the double digits, providing another avenue for durable earnings growth over time. Global franchise agreements increased 20% year-over-year during the quarter, reflecting continued demand across both our conversion-led and our higher revenue brands. Taken together, these trends reinforce my confidence that we're building a stronger foundation for sustained global and U.S. net rooms growth.

Beyond driving net rooms growth, we're also focused on disciplined capital allocation to maximize long-term shareholder value. Returning to our pure-play asset-light franchising roots remains an important part of that strategy. As development outlays continue to decline and market conditions improve, we expect to pursue additional capital recycling opportunities.

Together, those actions strengthen our financial flexibility, allowing us to allocate capital towards the highest return opportunities while continuing to return excess capital to shareholders. We're encouraged by the progress we've made this quarter. Our focus now is on staying disciplined, holding ourselves accountable and following through on the commitments we make. Stronger franchisee economics and thoughtful capital allocation put us in a better position to deliver durable earnings growth and long-term shareholder value. I believe this business has significantly more potential and delivering on that potential is what I'm focused on every day.

With that, I'll turn the call over to Scott.

Good morning, everyone, and thanks, Dom. It's great to have you back on our quarterly earnings calls in your new role. Our second quarter results demonstrate that improving U.S. operating fundamentals and the increasing contribution from our international business are translating into solid earnings growth. For the second quarter, adjusted EBITDA increased 6% to $175 million, primarily reflecting higher U.S. royalties from improving RevPAR and royalty rate expansion, growth in our franchisee programs and services revenues and higher partnership revenues as well as the continued benefit of our transition to direct franchising in Canada.

These benefits were partially offset by higher SG&A expenses, which I'll discuss in more detail shortly. Our adjusted earnings per share increased 5% to $2.02, while revenues, excluding reimbursable revenue from franchised and managed properties increased 7% year-over-year to $277 million. I will focus on 3 key operating priorities before discussing how they are shaping our updated earnings outlook. First, the improving trajectory of U.S. net rooms growth, supported by our stronger openings and lower exits.

Second, the acceleration of RevPAR from the first quarter and continued U.S. royalty rate expansion; and third, lower development spend as investments associated with Cambria and Everhome continue to moderate. Net rooms growth remains one of our most important drivers of our long-term earnings growth and operating indicators across our development funnel continued to improve during the second quarter.

Global rooms increased 2.6% year-over-year, driven by a 16% increase in room openings. In the U.S., gross room openings increased 27% year-over-year and 9% sequentially. At the same time, room exits declined 50% year-over-year. Franchise agreements awarded in the U.S. increased 30% year-over-year in the second quarter. We also shortened the average time from signing to opening for conversions by nearly 1 month, reinforcing the speed and efficiency of our development model.

The important point is that the key stages of our U.S. development funnel are moving in the right direction from stronger signings and faster conversions to higher openings and lower exits. Additional information on our U.S. net rooms trends is included in today's supplemental materials on our Investor Relations website. Choice's conversion capabilities continue to provide an important competitive advantage with conversions expected to represent approximately 90% of our 2026 U.S. openings.

Conversions generally enable owners to open hotels faster and with less capital than new construction, which remains important in the current development environment. During the quarter, U.S. conversion franchise agreements increased 82% year-over-year, reflecting the value of our conversion model delivers to hotel owners. Extended stay remains a key growth driver with 12 consecutive quarters of double-digit rooms growth and representing more than 40% of our U.S. pipeline.

Within our mid-scale and economy transient brands, developer interest also continued to strengthen. U.S. franchise agreements awarded increased more than 40% year-over-year, and the pipeline for these brands continues to build. Taken together, these trends reinforce our confidence that U.S. net rooms growth will return to positive territory in 2026. Our operations outside the U.S. continue to perform well with international net rooms increasing 13% year-over-year, reflecting growth across our EMEA, Asia Pacific and Americas regions.

In Canada, net rooms increased 5.4% year-over-year. Our transition to a direct franchising model is producing both an immediate earnings benefit and a longer-term growth opportunity as the pipeline continues to expand. Turning to RevPAR. Global RevPAR increased 1.7% year-over-year on a currency-neutral basis in the second quarter. In the U.S., RevPAR increased 1.3% year-over-year during the quarter, supported by improving occupancy and rate trends. Together with encouraging preliminary third quarter trends, this supports our improved full year outlook.

As anticipated, the FIFA World Cup contributed approximately 60 basis points to second quarter RevPAR. Because the event was concentrated in the second quarter with only limited activity in our markets during the third quarter, we estimate the full year benefit at approximately 30 basis points. Extended stay continues to benefit from a diverse mix of longer-stay demand drivers, including workforce-related travel, relocations, infrastructure investment and manufacturing activity.

Approximately 45% of our U.S. extended stay portfolio is located within 10 miles of major data centers, where those hotels generated approximately 100 basis points higher RevPAR growth than the system average during the second quarter. This highlights the benefits of our portfolio's exposure to durable project-based sources of demand. International RevPAR was up 2.1% year-over-year on a currency-neutral basis, led by the Caribbean and Latin America and supported by continued strength across Canada and Asia Pacific.

In addition to RevPAR and net rooms growth, we are also increasing the earnings contribution from each hotel in our system. During the second quarter, our U.S. average royalty rate increased 11 basis points. The increase reflects continued mix shift towards higher revenue brands and the benefits of the franchisee-focused initiatives Dom discussed. Our non-RevPAR fee streams also further diversify our earnings base. Franchisee adoption of our services continued to grow during the quarter, particularly our cloud-based property management system and revenue management solutions.

Partnership services and fees increased 6% to $28.7 million in the quarter, mainly driven by higher procurement revenues. Together, royalty rate expansion and growth in our partnership services and fees reflect our strategy of creating more value for franchisees while generating higher fee revenue from each hotel in our system. Adjusted SG&A increased 7% during the quarter.

The increase in our operating costs reflect our transition to direct franchising in Canada, which also contributed to the higher international earnings I discussed earlier. The remaining increase primarily reflected higher accounts receivable reserves. We expect adjusted SG&A growth in the second half of the year to moderate from the first half run rate, positioning us to deliver our full year guidance.

Turning to capital allocation. Our framework remains unchanged. We prioritize high-return investments, maintaining a stable dividend and returning excess capital to shareholders through share repurchases. Our wholly-owned hotels were originally developed to establish and scale the Cambria and Everhome brands or were acquired as part of the Radisson Americas acquisition. Today, we wholly own 19 operating hotels and 1 hotel under construction. With no additional wholly-owned hotels in our pipeline, we have substantially completed the capital-intensive phase of building them.

As a result, future growth will be driven through our franchise model rather than hotel ownership. Reflecting that transition, capital outlays for hotel development declined 80% year-over-year in the first half of the year. We are now well positioned to monetize those assets while continuing to grow through our franchise model. We currently expect the first disposition to occur in the first half of 2027, subject to market conditions.

Turning to our balance sheet. We ended the quarter with total liquidity of $475 million and net leverage of 3.1x adjusted EBITDA, comfortably within our target range of 3x to 4x. During the first 6 months of the year, we generated $67 million of operating cash flow compared to $116 million in the prior year period. The year-over-year change primarily reflects 2 factors. First, franchise agreement acquisition costs increased as U.S. room openings grew 27% year-over-year.

Second, operating cash flow was affected by higher marketing and reservation system reimbursable expenses, driven by increased investment in franchisee-facing tools and guest delivery capabilities. Year-to-date through July 31, we've returned $172 million to shareholders, including $133 million through share repurchases and $39 million through dividends. We continue to expect to repurchase between $175 million and $225 million of shares in 2026.

Based on our second quarter performance and the underlying operating trends we've discussed today, we are raising our full year guidance for adjusted EBITDA, U.S. RevPAR, U.S. average royalty rate and global net rooms growth. We are also raising the lower end of our global RevPAR guidance range. We now expect full year 2026 adjusted EBITDA of $635 million to $650 million. The increase primarily reflects stronger U.S. RevPAR, improved global net rooms growth and continued U.S. royalty rate expansion.

For modeling purposes, I'd note one item for the third quarter. The year-over-year adjusted EBITDA comparison includes approximately $9.5 million of liquidated damages within our other revenue line recognized in the prior year quarter that are not expected to recur, reflecting continued improvement in our franchisee retention. While our operating outlook has improved, we have updated our adjusted diluted earnings per share guidance to $6.86 to $7.10, primarily reflecting higher expected interest expense and a higher effective tax rate, partially offset by the benefit of share repurchases.

We now expect full year 2026 U.S. RevPAR growth of 0% to 1.25% and global RevPAR growth of 0% to 1%, reflecting stronger underlying operating trends and continued commercial execution. Consistent with that outlook, U.S. RevPAR trends remain encouraging, and we currently expect third quarter U.S. RevPAR growth to exceed second quarter levels before moderating in the fourth quarter. We now expect U.S. average royalty rate expansion of 7 to 9 basis points for the full year, a range that incorporates tougher comparisons in the second half of the year.

On net rooms growth, we now expect global net rooms growth of approximately 1.5% for full year, up from our prior expectation of approximately 1%. This reflects increasing confidence in the trajectory of U.S. net rooms growth together with stronger international performance. We remain on track to deliver positive U.S. net rooms growth for the full year, supported by both stronger gross openings and an expected 250 basis point improvement in our U.S. net exit rate compared with last year.

We expect the third quarter U.S. net rooms growth to remain broadly consistent with the second quarter levels with a more meaningful step-up expected in the fourth quarter as conversion openings seasonally increase and comparisons become more favorable. Adjusted SG&A for the full year is expected to continue to grow in the mid-single digits, benefiting from operating efficiencies across the business, including the continued scaling of AI-enabled tools. We are also investing more this year in franchisee-facing tools and guest delivery capabilities, which has increased our net reimbursable deficit expectations relative to last year.

As a reminder, these programs are structured to operate at a breakeven over time. Overall, the progress we've discussed this morning reinforces our confidence that improving execution is translating into stronger operating performance, positioning us to create long-term shareholder value. With that, Dom and I are happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of David Katz with Jefferies.

Thanks for the comment. I appreciate it. I'm sure that there's some nuance and complexity to having royalty rates go up and at the same time, delivering greater value to franchisees. Can you help us unpack, right, how that exactly works and why the royalty rate is up during a period of time where you're very obviously trying to increase the value proposition to franchisees?

Thanks, David. I'll kick things off. And if Scott wants to add any color, he certainly can. But I think first and foremost, this really goes back to the higher revenue per unit algorithm that we have. So when you take a look at the effective royalty rates increasing, a lot of that is really represented by the mix shift, right? So you're basically what's turning out of the portfolio is effectively your transient economy brands more heavily than what's coming into the portfolio. So when you think about adding Comfort, et cetera, in kind of that mid-scale, upper mid-scale segment, you effectively have that higher royalty rate across that portfolio.

I think the other is really just the value that we are driving for our franchisees. The focus has always been on driving franchisee profitability. That comes through a lot of different approaches. I think you heard that in the prepared remarks with regards to prototype costs being down 25%. Our loyalty contribution has increased 250 basis points. FF&E is down 20%. You've got Charlie sitting in the property management system at this point. And there's a lot of other things that we've done to work with our franchisees to reduce their fees.

I know one question has been in the past just with regards to how do you incentivize higher guest review scores. And we do have programs out there right now to reduce business as usual fees and other loyalty fees associated with those properties that are driving those higher guest demand scores. So again, we're working very closely with our franchisees. And candidly, we think that the increased value that we're providing is showing up in the stronger development results.

The only thing I'd add is these are contractual rates. As some of our older fee contracts have burned off or have been replaced with these new higher royalty rates that were put in really back in 2016, 2017, you're seeing that moved to more of the franchise agreements in the construct that we have today. So this isn't raising rates on existing franchisees, but more contractual as new hotel owners come into the system and pay the published rack rates that we have today.

Your next question comes from the line of Lizzie Dove with Goldman Sachs.

I just wanted to ask about the U.S. rooms growth trends, which looks pretty encouraging this quarter. And in the deck you posted, I think there was some interesting information about U.S. rooms exit this year versus last year, which seemed to improve a lot. So could you maybe just unpack that a little more? I'm curious how much of this is maybe that revenue intense strategy coming to an end versus just kind of underlying improvement under the hood and kind of what you're seeing there?

Yes. Thanks for the question. And as I mentioned, just with regards to the net rooms growth, this continues to be my top priority. I think the entire management team's top priority. And the first thing I would just say is consistent progress leads to our confidence. Right now, we are confident that we're doing the right things to drive that sustained net rooms growth well into the future. I think you mentioned the Q2 results specifically that we posted on the website. And really, it's the strength that we saw in Q2 that reinforces that confidence.

Our openings for the quarter were up 27%. Our exits were down about 50%. Franchise agreements were up 30%. And what's great about the franchise agreements is we have visibility, very strong visibility for the remainder of the year because 75% of those agreements that we sold this year, given the speed of the conversion engine will open this year. So again, we've got pretty good line of sight here over the course of the next 6 months. Obviously, it's early innings, but we're very much encouraged by that progress. I do believe that we're going to continue to see that acceleration.

One thing you did mention, Lizzie, obviously, the confidence is even better because of the mix, right? You talked about the revenue intensity. And when you take a look at those net rooms growth figures that are in the higher revenue intense segments, we're actually seeing about 100 basis points higher. So it's 3.6% versus the 2.6%. And one of the things also you mentioned is that coming to an end. And I think this is really important, just kind of sitting in the seat that I'm sitting in today. I absolutely think the net rooms growth algorithm can and should be a both/and.

We're going to continue to drive higher quality units with a higher revenue per unit, but there's no reason why we shouldn't be winning in the economy segment and kind of that lower mid-scale segment as well. And so we're going to continue to see improvements there. That's the goal. And the reality is we're going to continue to see improvements on the retention side as well because retention is equally as important as the development algorithm.

So again, overall, this is an area that we're very satisfied with the continued progress. We are going to continue to push on this and then try to drive acceleration in the back half.

Your next question comes from the line of Daniel Politzer with JPMorgan.

I wanted to talk about the RevPAR for the quarter, I think domestically up 1.3%, which lagged your weighted chain scale mix. I guess, how do we kind of reconcile that? And then similarly, I think you mentioned on the third quarter and fourth quarter, the cadence. It looks like the fourth quarter RevPAR comparison is by far the easiest of the year. So why should we think about RevPAR decelerating from 3Q to 4Q, if I had that right?

Yes. I'll start at kind of the top and just with regards to what we're seeing in the context of the current RevPAR performance, and then Scott can walk you through the Q3 and Q4 in terms of what we're assuming from a modeling perspective. But on the RevPAR side, I would say we're encouraged by the sequential progress totally agree with there's still more work to do here as well. And the reality is when you think about what we've invested in, we talked a lot about the $60 million of investments in the commercial engine that ultimately will be a huge driver for sustained RevPAR growth in the future.

So now it's just a matter of really executing, activating. We talked about EasyBid, business direct loyalty. Those are the types of things that we're encouraged by. And candidly, we're encouraged by the broader macro backdrop, which we can certainly get into as well. But while we saw the sequential improvement, when you take a look at just from an index perspective, there was a gap, right? And so I think when you peel back the onion, we are under-indexed in urban markets. We're under-indexed in business transient, which had a pretty big bounce back in Q2. And obviously, there was a World Cup tailwind as well. So having a lower number of units in those markets created that sort of gap.

We are encouraged by one trend that we are seeing very much in that occupancy. So we're continuing to drive occupancy index gains. And so our biggest opportunity at this point right now is rate. And when you take a look at the sequential improvements, it wasn't just quarter-over-quarter. We actually saw July improved by about 100 basis points versus June as well. So we're seeing progression there. There is some lumpiness and some timing phenomenon in the back half of the year that I think Scott can hit on as well.

Yes, Dan. So our second half of the year RevPAR guidance for the full 6 months is about 1.5%. As we mentioned on the call, we think that will be a little stronger in Q3. As Dom mentioned, we did see July up about 100 basis points. There are some calendar shifts in the August time frame with the Labor Day holiday pushed deeper into September and fewer weekend days in August than previous, which mitigates a little bit of our RevPAR performance given the higher concentration of leisure travel that we have.

We do see that moderating a little bit in Q4. As we've talked about in the past, our booking windows are fairly short. So we don't have a lot of visibility into that Q4. So I think when we gave our guidance of up to 1.25%, that does assume a little bit stronger Q4 if that were to take place.

Your next question comes from the line of Michael Bellisario with Baird.

First question, can we dig into the -- I think you said moving with greater urgency as one of your priorities. Just maybe help us understand sort of what people and processes have changed so far? What have you already seen impact in 2Q? And then what's still to come?

Yes. So I think broadly speaking, stepping into the role really just reinforced rather than fundamentally changed a lot of the thinking that I had, right? And I think one of the most important elements, and I mentioned this in my prepared remarks as well, it really is staying close to our franchisees. That's what matters most, really grounded in those relationships, the franchisee success system. Owner economics is the linchpin. I talked a little bit about the net rooms growth side of the house as well. And where we made some significant changes, frankly, was on the retention side of the equation.

I think from a people, process and systems perspective, there were several investments that we made back half of last year, and that's paying dividends today. I think you see it in the 50% reduction in this quarter alone with regards to the exits. And the last is really around just the commercial and technology capabilities. I think AI is obviously the flavor of the day, so to speak. And I don't think it's just a flavor. I think it's going to be sustained. And we see that as the next part of our technology evolution, so making sure that we're holding those teams accountable.

I think what has changed is really just importance of accountability and communication, both internally and with all of you. I don't think we should ever be sitting on a quarterly earnings call and have surprises. And so that's going to continue to be something that I urge the team to do as well. And we simplified parts of the organization by just realigning some of the functions that naturally work together, single points of accountability around key operating priorities. And at the end of the day, that's about reducing friction, making faster decisions and translating all the things I just talked about into results. And ultimately, you're going to evaluate us based on the results that we deliver.

Got it. That's all very helpful. And then just on your guidance, if I can ask a second one here. Just maybe remind us of your philosophy around sort of conservatism, I guess you just sort of touched on communication, too. And then any puts and takes to call out with EBITDA up only 0.5 percentage point, but RevPAR up by more than that, plus better net unit growth and higher expected royalty rate expansion. Anything to call out there in the back half?

Sure. I think at the highest level, we did beat the internal forecast that we had, and we flowed that beat through. So very much encouraged by the trends we're seeing across every core revenue driver, rooms, RevPAR effective royalty rate. To Scott's point, some of this is timing related. There are a couple of puts and takes specifically in the back half. And I think Scott mentioned that in his prepared remarks as well. In Q3 of last year, we did have elevated liquidated damages that are tied to exits. And so we brought this number down, which actually is a good news story for the algorithm.

Obviously, there's a onetime reduction in revenue associated with that. But given the fact that we are more encouraged by the rooms progress, that's going to be a better long-term value driver for us. So we're pretty excited about that one. I would say we're taking a more cautious approach to EMEA, in particular, to Europe and just given what you're seeing overseas. And the reality is if we continue to execute the way that I know we can, you could possibly push to the higher end of the guidance. But as of right now, the midpoint is effectively where we feel most comfortable.

Your next question comes from the line of Shaun Kelley with Bank of America.

Dom, welcome back to the public calls. If I could just maybe have you guys elaborate on 2 areas. First one, Dom, maybe a high level sort of owner health and sort of the cost, I think, all-inclusive costs of franchising to owners has been a theme kind of throughout the entire lodging industry this quarter. So I'm kind of curious on how that impacts your philosophy or your thinking sort of how you maybe weight your brands and your offering relative to some of the other things that are being done out there as you're starting to see other franchise companies starting to kind of use some of their heft and weight to try and get, I think, slightly better deals for their franchisees or charge them all-in fees that are a little lower.

So that's kind of the high level one. And then maybe one for Scott. If you could just quickly give us thought, I think, on the key money environment. On the one side, I think you said that contract acquisition costs were up pretty materially in the first half of the year. But on the other side, I think all-in capital intensity with CapEx and some of the renovation stuff you're doing is down. So just trying to weigh those 2 factors and think about key money investment for the balance of the year.

So I'll start at the high level and then Scott could hit the second part of your question. And I mentioned a little bit of this in I think the first question, but when you take a look at what we're doing to lower the cost for our owners, I mean, we don't have perfect visibility into their P&L. So I'll start with the bottom line upfront. We believe it's still in that teens in terms of owner returns and whatnot. We're seeing the improved value proposition showing up in the development results.

So when you take a look at where we were last year versus this year, I mean, we're lowering the cost of customer relations. We're exploring insurance options. We've reduced -- we're in the process of having conversations with regards to reduced commissions, the cost of prototypes being down 25%, FF&E down 20%. So all in all, we feel like our value proposition is very much competitive against the competition. And that's really again showing up, I think, in the 30% higher development results this quarter versus where we were last year.

So again, the profitability is going to continue to be core to who we are. And what's been very consistent in every conversation I've had with franchisees, and I've probably talked to hundreds since I've stepped into this role now at this point, they want the lower cost, and those are all the things that I just talked about. They want to see stronger top line and a lot of those commercial capabilities that I talked about as well, we are confident that it's going to show up in top line gains in the long term. And they want tools that makes their lives a lot easier.

And the one piece of feedback that we've gotten, in particular, is this AI-enabled teammate, Charlie, within the property management system. And that alone has reduced operational request to corporate by 40%. So if you have the ability to replace some of those -- some of that FTE time so that they could go spend with their guests, et cetera, that's a net benefit. So again, we feel like we're well positioned. We're going to continue to pound the pavement in the context of our development this year and looking forward to continuing to drive their profitability.

Shaun, in terms of your question about capital intensity. So as you mentioned, the key money was up from the first half of '25 into the first half of '26, was really driven by the rise in the number of room openings we've had during the quarter. So we were up about 27% in room openings in the U.S. compared to the prior year. And additionally, the mix of hotels that opened has shifted. We've seen a lot more stronger growth in our core brands of the mid-scale, upper mid-scale and upscale, which bring us higher revenues, but also sometimes slightly higher key money checks.

But overall, we feel really good about where we are in terms of the amount of key money that it takes to win the deal. We haven't seen that increase. We really have a disciplined strategy against that, and we underwrite those to really attractive returns with reasonable payback period. So what you're really seeing is a healthier pipeline coming in and more openings. With that, we do believe that our use of key money will be slightly higher than we originally talked about earlier in the year, probably in the order of $15 million to $20 million higher.

But on the flip side, as you also mentioned, we are seeing less capital intensity as we wind down the development programs for both our Cambria and Everhome programs, which were -- the use of that capital was down 80% for the first half of the year. We expect that to be down about 70% for the full year. And as we wind up the more capital-intensive phase of building out those brands and return to asset-light franchising, which is our core offerings, we will move now to start exploring the sale of those assets. As we said in the prepared remarks, we have started to evaluate the timing of those sales. We do expect some of the first ones to happen in the first half of 2027.

Shaun, the only thing that I would add just on the money side of the house, too, is we've been very -- sorry, Shaun, I was just saying the only thing I would add just on the key money is that we've been pretty disciplined in the context of tying that key money more closely to our property improvement plans. And just in terms of, obviously, the cost to convert is a huge consideration for any owner. And so being able to effectively offer them a property improvement plan that allows them to convert a project that is lower in cost, but also ties that key money to ultimately improve the product and drive the better guest experience, AI benefits and otherwise, something that we're being very disciplined in doing. So again, feeling good about the way that we're using the key money to improve the product portfolio.

Your next question comes from the line of Patrick Scholes with Truist Securities.

Congratulations on the net rooms growth improvement. I'd like to just step back and ask a high-level question here. When I think about 2 or so years ago with the failed Wyndham takeover, one of the things that really percolated up that maybe wasn't as well known was some dissatisfaction from your franchisees or I should say, less than ideal franchisor franchisee relationships versus perhaps that of some of your peers. And in that regard, I recall around that time, you folks had dropped out of the AAHOA organization. Would you ever consider rejoining that organization that certainly being the largest franchisee organization out there?

Yes. Thanks for the question. I mean I think, first and foremost, we've said this previously, but we paused the membership. We never paused the relationship with AAHOA. And so I think that's first and foremost. We continue to work with them very collaboratively in the context of those items that ultimately support a broader franchise business model that ultimately support the hotel industry. There are many, many things and candidly, the vast majority, 99.99% of the things that we are more aligned on. And so I think there was one element in particular where all the hotel companies paused that membership.

Not saying that if there was an opportunity to rejoin that we wouldn't. It's a conversation that we would certainly entertain. But the reality here is we work very collaboratively with our self-elected owners councils to really address those items that our franchisees are dealing with day in and day out. Many of those members are also members of AAHOA. So again, there's a collaborative effort on that side as well.

And broadly speaking, we feel like the relationship that we've had with our franchisees has never been better. We continue to see that, and we had that experience at our franchisee convention just 2 months ago, and we're encouraged by the continued feedback that we're getting from our franchisees with regards to everything that we're doing to allow them to operate their businesses more effectively to drive their profitability. And it's showing up. I think it's showing up on the retention side of the house.

And there's a reason why we believe that the numbers are down 50% in terms of the exits from the portfolio year-over-year, and that's because of not just the performance that we're driving, but the broader relationship that we have with them and the trust that they have in us.

Okay. And then a follow-up, not so much as a question, but just passing on quite a few thoughts or requests from a number of shareholders this morning. Certainly, what I'm hearing is we, myself and shareholders certainly would encourage more granularity, and you've certainly talked about from a high level on this, but certainly more granularity to address RevPAR improvement. When we look at the index of your performance, it looked to be about 300 basis points below.

I get it, some of it may be location or customer, but I don't think that explains the whole thing. So certainly, going forward, providing as much granularity as far as your plan to improve that would certainly go a long way. So just passing that on, and I appreciate your consideration.

Absolutely. Thanks for that, Patrick. And the reality is communication and transparency are critical. I think we are doing a much better job as it pertains to showing the puts and takes on the net rooms growth in the prepared remarks on the RevPAR side. We obviously try to provide that, and we'll continue to do so in the future.

Your next question comes from the line of Robin Farley with UBS.

Two questions. One is just going back to the commentary about the expected increase in U.S. rooms really sounds like in Q4. Maybe I'm doing the math wrong on this, but it looks like your U.S. pipeline is down year-over-year. So is the growth in U.S. rooms, is it more just this fewer exits? Is that the right way to think about it? And is there -- are you sort of -- was there a purposeful program to get rid of certain properties that now is winding down? Or just to understand the components of that U.S. growth.

Thanks for the question, Robin. And I'll hit it at a high level. And if Scott wanted to add anything, certainly can. But I think it is coming from both, right? It's coming from an increase in openings. I think in this quarter, you actually did see a 27% or so increase in the openings. And so we're very encouraged by what we're seeing. And the reality is that the vast majority, about 90% of those openings and that we expect in the full year as well are coming from conversions. And so we have that proven conversion engine.

We're actually seeing a reduction in the time between a franchise agreement being signed and when a hotel opens by almost 1 month. And so again, we're seeing speed to open increasing as well. So we're very encouraged by the fact that about 75% of the conversions that we're signing this year are going to open in year, so we do expect to see a pretty significant -- well, the increase that's in line with the guidance, at least on the opening side.

We also continue to see the trend that we're seeing on exits continuing in the back half of the year. So it's going to be a both/and as it pertains to the opening side and the exit side. New construction obviously has been light across the industry. Supply growth is less than 1%, which is one of the reasons why you're seeing the pipeline where it is. But we're not just looking at the pipeline in terms of the catalyst for future growth because of that conversion engine that we do have. So again, very much excited about where we're heading there.

As Dom mentioned, it really is a conversion story today. And if you look at our conversion pipeline in the U.S., it's up about 24% since last year at the same time and up about 6% sequentially since the end of March. So really reflecting the success our franchise development team has done in signing agreements and as Dom mentioned, new construction has declined year-over-year as we've seen less starts with the current economic conditions, but it's basically flat since the end of the year. So really, it's increasing conversion openings as well as a decline in our termination rate, which is expected to be down about 250 basis points year-over-year.

Okay. Great. And then my other question was just if you could help us understand, you talked about the net capital outlay for hotel development declining pretty significantly. But also in the quarter, you talked about the increase in franchise agreement acquisition costs. So can you just help us understand what is different about those 2 buckets?

Yes. The net development outlays are really focused specifically on building hotels through wholly owned ownership, joint ventures as well as loans. So those were specific programs that we had done to launch our both Cambria and Everhome brands. And now that we've gotten both of those to the scale that we believe is necessary for them to grow more in an asset-light nature and franchising only, we're able to pull back the spending on those programs and now move to recycle that capital. So that will be capital that comes back in.

Key money is more focused on cost of acquiring a franchise agreement. And as Dom mentioned earlier, really, it's around helping the owner as they transition to our brands to upgrade the hotel, make sure the quality is in the right spot for each one of the brands to make sure we're enhancing guest experience. So those come with a very long franchise agreement and assuming the franchisee operates within our system over the term of the agreement, the key money is forgiven over time.

So really, it's a cost of acquiring the contract, but very high IRRs on that as we go forward. So a little bit different. When you look at the overall capital intensity of the business, it's certainly declining, and we expect free cash flow conversion over the next several years to get back to more of the historical levels that we've had.

Your next question comes from the line of Stephen Grambling with Morgan Stanley.

So maybe just a follow-up there and I guess, in the vein of disclosure, I guess, what percentage of the key money that you expect this year is for supporting existing owners versus what's in the pipeline? And then some of your peers have also talked about supporting owners through programs to incentivize them spending on properties and aligning the brand with owners. It sounds like you're alluding to a bit of a similar dynamic with your own cost reductions, but should investors anticipate this will be funded through your P&L or the system fund? Or are you finding outright reductions and the system fund should still be kind of breakeven longer term?

Yes. So I'll hit the cost and the key money associated with the existing owners. And the reality is when an owner is coming up on an expiration or whatnot, obviously, in order to retain that owner, we expect for them to have a capital outlay associated with improving that particular hotel, that's our opportunity to work with them on what that property improvement plan looks like, making sure that we're ultimately tailoring it in such a way that meets their needs, but more importantly, the needs of the guest in terms of those longer-term guest reviews and whatnot.

And so you are seeing us being able to meet the owner where they are as it pertains to retaining them and as it pertains to supporting that property improvement plan. There's other creative things that we've always done in the past, candidly, that I know some of our competitors are talking about today with regards to reducing certain fees as well based on guest review scores. We have an internal acronym for it, but it's effectively your guest review scores around hitting a certain threshold and having a reduction in a loyalty fee hitting a certain score and having a reduction to other business as usual fees and customer relations and whatnot.

And so again, there's the capital piece that ultimately flows through the P&L. And then there's the P&L piece that does not have a material impact on the effective royalty rate and the overall royalty fees as well.

In terms of your question on key money, so we have -- at this point in the year, we have fairly good visibility in terms of how much key money is tied up into the pipeline today. Certainly, the timing of disbursement can fluctuate over periods as our hotels, particularly, as we mentioned earlier, 90% of our openings this year will be conversion open within 3 to 6 months. But there can be unforeseen circumstances as people do their property improvement plans that could either accelerate or push that into the next year.

And there will be still deals that we'll do for the remainder of the year that will open in the year that we have not executed yet. So there's always a little bit of volatility in terms of predicting the key money in any one period. But generally, we have a very good sense of kind of the total outlays over an 18-month period.

Your next question comes from the line of Trey Bowers with Wells Fargo.

I guess in the vein of what have you done for me lately, you guys have done a great job kind of breaking out the net capital outlays and the improvement from last year. But as we look out to 2027 and think about free cash flow dynamics, should we expect that to be a net positive number next year, less negative? Just any framework as you guys look to start to distribute some of these assets, what that could mean?

Yes. At this point in time, Trey, we're done at the end of this year for the most part. There may be a few dollars that trickle into 2027, but as the final projects are finished. But the capital outlays, there's no more commitments to that. So at this point in time, in terms of our support of Cambria and Everhome, we should -- we will be net recyclers of that. So as we wind up some of the joint ventures we have, as we sell the wholly-owned assets, as we collect the outstanding loans we have, we will be in a net surplus position, which will obviously be a tailwind to our cash flow.

So we expect no more substantial money to go out and really over the next 12 to 24 months as we work through the market conditions and take those assets to market to be net recyclers of capital.

And then I guess as a follow-up, as I think about the owned portfolio, is that a number that over time should go to 0? Would you like to be 100% franchised? Or will there always be some small portion of the portfolio that you guys want to hold on to just to kind of control brand standards? And then finally, against that, any sense of kind of magnitude if you were to execute all these sales, what that would mean?

Yes. In terms of ownership, that's really not in our long-term plans. The hotels we own really are concentrated in 3 different ways, as I mentioned earlier, building some Cambrias and early Everhomes to get the brands launched. And then we did acquire 3 assets when we acquired Radisson. At this point in time, we don't see any long-term strategic value into owning them. We are an asset-light franchising company. So we do not plan on holding any of the assets really around -- now it is around making sure that we're maximizing the value on sales as well as retaining franchise agreements is really where we're focused on.

In terms of magnitude, we've got about $650 million on our balance sheet related to those programs. It is mixed between owned hotels, some joint ventures we have as well as lending. About $450 million of it is on owned hotels. So that would be the more immediate area that we have the ability to go sell and monetize those prior investments.

Your next question comes from the line of Meredith Jensen with HSBC.

Two very quick things. One, Scott, I think you mentioned some penetration in terms of loyalty. I was hoping you might discuss a little bit further what you're seeing since the refresh, what some opportunities you're seeing maybe in the future given that increase of engagement? And secondly, if you might speak a little bit more about the partnership revenues in terms of the moving parts in there and sort of the sustainability of how we might model that over the longer term?

And I'll start with the loyalty piece. And the reality is we're very -- we're encouraged by the progress that we're seeing. I think the most important kind of result that we wanted to highlight there is just the increase in loyalty contribution, which is in that 250 basis point range. And at the end of the day, that's all about driving our franchisees' profitability. So the more direct business that we're driving to them through the loyalty program, the better their economics are going to be.

And so again, the relaunch of the loyalty program in isolation was a great win for us, but it's a bigger part of that commercial ecosystem that we've invested in to really close that RevPAR gap and to really drive the same-store sale number higher in the future. So that's part of a loyalty tool, a guest data platform, the relaunch of our -- or the launch, I should say, of our EasyBid RFP response tool. So it's a consolidated ecosystem, candidly, that's made up of a number of different programs that we think is going to be a net tailwind for us from a RevPAR perspective into the future.

We're also seeing an increase in active members within the loyalty program itself at the highest level. And then the last piece is really those new loyalty program members are actually driving more RevPAR than the loyalty program members that we added during the same period last year. So again, all encouraging signs. I'm not going to take a victory lap just yet. It's early days, but we feel like this is going to be a big part of that commercial engine into the future.

And it dovetails well into the partnership question you had as we continue to bring more guests into our ecosystem and a higher-value guests, they're very valuable to the various partners that we have. So gives us the ability to cross-sell different services, whether they're travel adjacent or something else to our most loyal members, which we then earn fees off of. So the growth of the loyalty program really sets us up well to continue to monetize that guest in other ways to drive that revenue line item.

The other area for the partnership services and fees that we focus on very much, and it's been the theme of this call is franchisee economics. So leveraging the size and scale of our overall franchise system to drive down the cost of operating a hotel, whether that's through the various procurement of the types of items that are used in the hotel, whether that's driving down cost of converting the hotels that we talked about the 25% reduction in prototype costs. As we do that, we're able to both lower costs for our franchisees, but also then earn fees from those third-party vendors.

So we feel good about where we are on those programs. Our guide for this year is kind of that mid-single-digit increase, but I think we have a lot of opportunity in the future to accelerate that growth.

That's super helpful. Dom, did you mention the actual -- the penetration or the contribution for the loyalty just so we can keep track on the progress?

We didn't disclose that, but I mean it's different across the chain scales. In the past, we've talked about it being a little north of 40% across. But again, kind of in the mid-scale and above, you see a much higher loyalty penetration.

Yes. Really, the portfolio is very different. So below the 30% in our economy brands, but when you get to the upper mid-scale and upscale hotel is more in that 50% to 60% -- close to 50% to 60% range where it blends to 40%. And I think that's pretty common across the industry, particularly in the economy segment where it tends to be a little more cost conscious and less value guests. But as you move up the chain scale, a lot more loyalty from your guests.

Your last question comes from the line of Alex Brignall with Rothschild & Co.

The first one is just on the churn rate, massively appreciative of the new color that you've given for the U.S. Is there anything that you could just tell us whether it's directional in terms of the international piece or just what it would look like on a whole system basis and whether that 250 basis point reduction in churn would apply across the whole group? And if not, why there are differences?

And then just in terms of the reimbursable revenue and expenses, obviously, the gap has widened a little bit. Could you just talk about how this will progress in sort of outer years?

Yes. So I'll hit the international and just the broader portfolio net rooms growth question and specifically on the churn rate and then Scott can hit on the reimbursable. But when you take a look at just where we are from a net rooms growth perspective, we would expect to see international consistent into the future as it pertains to the churn rates. International growth this year was pretty significant. And so we're lapping a pretty tough comp in the back half of the year. So right now, with the net rooms growth at 2%, and we're guiding to globally about 1.5%, that's because of the fact that we're lapping that pretty difficult comp.

But we do expect to still grow our international portfolio and, call it, kind of the low to mid-single digits after 13% growth year-over-year. And so those churn rates, we expect to stay stable. Obviously, we're continuing to see the openings as well throughout that portfolio. We are seeing significant momentum in Canada following the transition to direct franchising or I should at least say momentum where we're driving mid-single-digit net rooms growth, low to mid-single-digit RevPAR growth. We also do see an opportunity in CALA following the Radisson acquisition.

And Asia Pac remains a little bit of a distribution market for us outside of Australia. So again, encouraged by the continued progress there. I wouldn't sit here and say you should expect to see 13% rooms growth internationally over the course of the next 6 to 12 months. But I think you're going to see more of a moderation, which means as U.S. growth picks up, we feel confident in that 1.5% guide.

Yes, Alex, in terms of your question about the marketing reservation reimbursable. So yes, we have had a temporary acceleration of the investments really around our franchisee and guest value proposition. So we've been investing in capabilities that improve distribution, strengthen our reservation delivery, modernize our loyalty technology and improve our rate setting abilities, which ultimately will help franchisees acquire customers and operate their hotels more efficiently. The current level of spending is not intended to represent a permanent run rate.

We did have some accumulated surpluses from prior years where we're able to fund this defined period of elevated investment. So as we wind those up, I would expect this to kind of be the high watermark in terms of the amount of spending in this year, and we'll see that start to come down as these investments are completed this year and going into the following year. So those reimbursable expenses as measured against revenues will be more aligned.

Could you quantify the surplus that you had there, please?

Yes. Coming into the year, we had a little over -- I think it was about $25 million in surpluses. So we are going into more of a deficit with the spending levels this year. But the way our contracts work is we will then recover that over the next several years back to breakeven.

A final question coming from Brandt Montour with Barclays.

I apologize if I missed this. I wanted to ask about the pipeline, the domestic pipeline specifically and the fact that it's down quarter-over-quarter, down year-over-year. I know franchise agreements and signings are up and they're sort of moving in a better direction, opposite direction. I know the pipeline is not really representative of the signs because you're conversion heavy, but you kind of always have been conversion heavy.

So I guess the question is why are those numbers moving in the opposite direction? And if there's a significant change of mix toward closer in conversions and why not sort of just put them in the pipeline?

Yes. There's a couple of stories within the story there, Brandt. And I think when you take a look at the pipeline year-over-year, there was a pretty significant set of hotels that were in the pipeline globally, so in our international division, which led to the 13% growth. So those effectively were open hotels that brought the pipeline down. When you take a look at the domestic pipeline year-over-year, it's effectively flat. And I think it's down 40 basis points, 0.4%.

So a lot of that has to do with the fact that, again, new construction has been pretty muted. And I think we are encouraged by new construction that we're seeing on extended stay, which now represents about 40% of the pipeline, 13% unit growth. And so we continue to see that momentum on the extended stay portfolio. But broadly speaking, you are seeing just a higher velocity within that conversion -- those conversion development agreements, where we actually reduced time to open by, I think it was between 10% and 15%.

And so again, the more development agreements that are being signed, the more you're basically seeing open in the year or in some cases, even within the quarter. So that -- those aren't even showing up in the pipeline. So again, we're still pretty darn confident about where we're heading from a net rooms growth perspective, which is why we guided even with the pipeline effectively staying flat year-over-year domestically.

Yes, Brandt, yes, I think to the point we made earlier, we really are more in a heavier conversion, especially in the U.S. environment, we have about 90% of our U.S. openings this year. Historically, it's been more mid-60s just with the lack of supply growth across the entire U.S. industry. So really, if you focus where we've been focused on is our U.S. conversion pipeline is up 24% year-over-year and 6% sequentially since March 31 of this year. So we are seeing, to your point earlier about the increase in franchise agreements, we are seeing that more on the conversion side, and they're moving through the pipeline really quickly. So the pipeline is not always representative at any point in time of the velocity and the unit growth potential.

There are no further questions at this time. I will now turn the call back to Dom Dragisich for closing remarks.

Thank you, operator, and thanks, everyone, for joining us this morning. We're looking forward to meeting with you again in November when we report our third quarter results. But in the meantime, we both hope you have a great rest of your summer.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, and welcome to the Annual Meeting of Shareholders of Choice Hotels International, Inc. Please note that today's meeting is being recorded. [Operator Instructions]

It is now my pleasure to turn today's meeting over to Jeff Lobb, Senior Vice President, General Counsel and Secretary of Choice Hotels International, Inc. Mr. Lobb, the floor is yours.

Thank you. Good morning, everyone. Welcome to Choice Hotels International's 2026 Annual Shareholders Meeting. I'm Jeff Lobb, the company's General Counsel and Secretary. I'm pleased to welcome everybody who's called in to join us this morning. As we've done in the past, at the conclusion of our formal portion of the meeting, we'll have a short Q&A session with Dom Dragisich, our newly appointed Interim CEO. Shareholders who've signed in using their control number can submit questions through the meeting portal, and we will endeavor to answer appropriate questions as time permits.

I am now calling this meeting to order. The Choice Hotels' Board of Directors set March 23, 2026, as the record date for this meeting. The only holders of shares of our common stock at the close of business on that record date were entitled to notice of and to vote at this meeting. On the record date, there were 45,757,096 shares of our common stock outstanding and entitled to vote. I'd like to welcome the members of our Board of Directors that are present this morning at our meeting, and that includes our esteemed Chairman, Stewart Bainum, Jr.

I'd also like to welcome Pam Masterson and Jordan DeDona of Ernst & Young, company's independent registered public accounting firm. Sharon Hull, our newly appointed Assistant Corporate Secretary, has been appointed as inspector and judge of this election. Sharon has previously delivered her oath to the Chairman, and Sharon will now give us a report on the attendance.

Thank you. A total of 43,441,614 shares of Choice Hotels International, Inc.'s common stock are present at this meeting in person or by proxy, representing approximately 95% of the outstanding common stock of the company. Therefore, a quorum is present, and this meeting is authorized to transact any business that may properly come before it.

Thank you, Sharon. We've delivered to our Chairman for filing affidavits to the effect that on or about April 22, 2026, a notice of this Annual Meeting of Shareholders, proxies and the proxy statement were mailed to all shareholders of record on the record date. A complete list of shareholders who own shares of the company's common stock on the record date, which was duly certified by the company's transfer agent, Computershare, was available for inspection by shareholders on the meeting portal.

It's now my pleasure to introduce Stewart Bainum, Jr., Chairman of the Board of Directors. In accordance with the bylaws of the company, Stewart will preside over the meeting. Mr. Chairman?

Thanks, Jeff, very much, and welcome, everybody, to Choice Hotels Annual Shareholders Meeting. Before we get into the voting, I just wanted to acknowledge the company's announcement yesterday regarding a leadership transition. I'm going to speak a little more about the changes after we've completed the formal voting portion of the meeting. But let's now proceed to the business of the meeting. The polls are now open, and I'm going to introduce each item of business. I think there's 4 items of business here before us this morning.

First, though, a quick housekeeping note, and this is important. If you previously sent in your proxy or have already voted by phone or Internet, you do not need to take any further action unless you wish to change your vote. Shareholders who have signed in using their control number and who have not yet voted or who wish to change their votes, you may do so by clicking on the Vote icon on the meeting portal and following the instructions there. Any votes received prior to the polls closing will be, of course, collected and delivered to our election inspector.

So we're going to begin with the election of 11 directors. Each will serve a 1-year term until the 2027 Annual Meeting or until their earlier resignation. Before we move to the vote, I'd just like to express my thanks to the current Board members for the significant contributions each of them provide to the company. I'm really honored, you'd expect me to say this, but it's really true. I'm really honored to serve alongside these individuals as Chair of the Board.

The Board has nominated the following individuals for reelection: Brian Bainum, I'm going to vote for him. William Jews, Monte Koch, Liza Landsman, Pat Pacious, Ervin Shames, Gordon Smith, Maureen Sullivan, John Tague, Donna Vieira and me, Stewart Bainum. If you're interested in learning more about the background of these individuals, if you're not that familiar with them, there's quite a bit of good information in our proxy statement.

So a majority of shares now is required to elect the nominees for director. Sharon, I think you have a count already because you've been counting these proxies the last few days. Could you report, please, on the preliminary results of the voting?

Of course. A majority of the shares represented at the meeting voted in favor of each of the nominees for election to the Board. Therefore, each of the 11 named nominees are elected for a 1-year term that expires at the 2027 Annual Meeting.

Thanks, Sharon. No surprises there, and congratulations to each on your election. Now secondly -- second item of business, as required by the Dodd-Frank Act, the second item is to seek a shareholder advisory vote regarding compensation of the company's executive -- named executive officers. The vote is advisory. However, the Board's Compensation Committee will certainly consider the outcome of the vote as it continues to think through the company's executive compensation program. Majority of shares represented at the meeting is requested. Sharon, you've got some results, if I may.

I do. A majority of the shares represented at the meeting voted in favor of the proposal. Therefore, the advisory vote on executive compensation has been approved.

Okay. Was it a close vote? Or was it a large majority?

A large majority.

Okay. Thank you. The third item on the agenda is to approve an amendment of the certificate of incorporation, increasing the Board size range from 3 to 12, which it currently is 5 to 15 members of the Board. A majority of the outstanding shares is required to approve the proposal. Sharon?

Thank you. The amendment to the certificate of incorporation increasing the Board size range from 3 to 12 to 5 to 15 was approved by a majority of the outstanding shares.

Thanks, Sharon. You're doing a commendable job, much appreciated. The fourth and last item on our business agenda is to ratify the appointment of Ernst & Young as the company's independent registered public accounting firm for the current fiscal year, the fiscal year ending December 31, 2026. The majority of shares represented at this meeting is requested. Sharon, what's the count on this one?

Okay. A majority of the shares represented at the meeting voted in favor of the proposal. Therefore, the appointment of Ernst & Young as the company's independent registered public accounting firm for the fiscal year ending December 31, 2026, has been ratified.

Great. Great job, Sharon. Thank you. There's no other business that has been brought before this meeting. So the polls are now closed and the formal business portion of the annual meeting is concluded. I just want to take a moment and recognize our announcement yesterday regarding leadership changes at the company.

First, I just want to thank Pat Pacious for his 21 special years of his very meaningful contributions at Choice, including his outstanding service as the President and CEO since 2017. Pat has led the company through really remarkable change and was a fierce leader during the pandemic for all our stakeholders, our franchisees, our associates and certainly our shareholders as well. So we will -- the company will be forever grateful to Pat as we transition to this next stage of the company. Happily, Pat has agreed to continue to serve as an adviser to the company through August and will be of invaluable assistance to Dom, our interim CEO.

And we're delighted to welcome Dom Dragisich as our Interim CEO and know Dom strategic financial and operational experiences of the company over the last roughly 9 years, I think, will ensure a smooth transition with continuing focus on executing our strategic priorities to deliver long-term value for all of our stakeholders, our franchisees, guests, associates and shareholders.

I'm going to turn things back over to you, Jeff, and I know you're going to facilitate the Q&A session. So thanks, [indiscernible].

Thank you, Stewart. As I previously mentioned, due to time limitations here this morning, we may not be able to address every question that we receive right now. It looks like we will have plenty of time. But if we don't, I apologize in advance if we don't get to a question that any shareholder submits. Just some legal housekeeping. Please note that Dom's remarks and any responses to shareholder questions may contain forward-looking statements. Actual results could differ materially from those projected or stated. We undertake no obligation to update or revise publicly any of the forward-looking statements, whether because of new information, future events or other factors, or we refer to the information contained on the slides on the web page that contain more information about risks that could impact our results.

Before we open up for Q&A, Dom, would you like to make any general remarks?

Sure. Thank you, Jeff, and a warm welcome to all of our shareholders for joining us today. On behalf of the entire Choice Hotels International team, thank you for your continued investment and confidence in our company. I'm excited to help drive the next phase of Choice's growth and look forward to collaborating with you, our shareholders as well as our amazing franchisees and associates. Choice Hotels continues to execute a clear strategy, drive franchisee economics and rooms growth to deliver high-quality earnings, strong cash flows and more durable shareholder returns.

In full year 2025, we achieved yet another year of record profitability, delivering adjusted EBITDA of $625.6 million, up 4% year-over-year. These results were driven by our higher revenue brand mix, continued portfolio optimization and the continued strengthening of our franchisee success system. In Q1 2026, we delivered record first quarter revenues of $340.6 million while driving strong development and RevPAR performance. In fact, we had the highest number of U.S. hotel openings in any first quarter over the last 5 years. And excluding the 2025 hurricane impact, we drove nearly 2% year-over-year RevPAR growth.

Additionally, our development pipeline is well positioned to drive future growth with 97% of the rooms in our higher revenue brands. Our pipeline properties are expected to be roughly 1.7x more accretive than our current portfolio. Our ability to create value starts with the strength of our franchisee model and ability to drive the right customer through the right channel for our owners. From revenue delivery and distribution to personalized operating support and targeted brand investments, we are continuously strengthening our franchisee success system. The work we have done over the past several years has positioned us as a more accretive asset-light company.

As we move forward in 2026, 3 main themes will capture the essence of what's happening at Choice Hotels. First, we're seeing steady net rooms growth in the U.S. with more hotels opening and fewer exits from our portfolio. Second, franchisee unit economics are improving, meaning our owners are seeing better returns, thanks to stronger revenue and lower costs. And third, our capital intensity is declining, which means we're investing smarter and returning more value to our shareholders. Our growth would not be possible without the dedication and commitment of our franchisees, the Choice Hotels associates who support them and our Board with its leadership and oversight.

So thank you to all of them. And thanks again to our shareholders for your trust in Choice Hotels International. And now we're happy to answer any questions. Jeff?

Thanks, Dom. We've got a question here about artificial intelligence. Can you talk about how Choice is utilizing AI in our business?

Sure. Absolutely, too, Jeff. And it seems to be the question of the day, every day. So yes, we utilize AI really in every facet of our business from how our guests shop for, how they book our hotels really with greater ease to how we drive our owners' unit economics by developing, deploying cutting-edge AI-driven capabilities to really help them run their businesses more effectively. We also do it by improving how our associate productivity increases day in and day out. A great example of this, Jeff, is really the recently launched platform called EasyBid to capture more group business. It's really enabled our hotels to improve their response times to group RFPs by about 30% is what we're seeing in the early results.

And we've already seen that translate into conversion rates that are about 250 basis points higher actually. Just last week, we launched Choice Hotels Business Direct to win more midweek business from small- and medium-sized businesses. And nearly -- when you take a step back and think about it, nearly half of the U.S. workers, they're employed by SMBs. And so these new AI-enabled digital booking platforms, they really enable these businesses to book stays direct on choicehotels.com. So those are just 2 of many examples of how we're really harnessing AI to drive demand, really drive that top line for our hotels.

Thanks, Dom. It appears as if we do not have any further questions. So with that, that concludes our Q&A session as well as today's meeting. Once again, thanks to everybody who called in to participate in our virtual meeting. The meeting has concluded. Thank you.

This concludes the meeting. You may now disconnect.

_Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's First Quarter 2026 Earnings Call. [Operator Instructions] I will now turn the call over to Allie Summers, Senior Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. Before we begin, please note that today's discussion includes forward-looking statements as defined under U.S. securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information, please refer to our filings with the SEC, including our most recent Forms 10-K and 10-Q. These statements speak only as of today, and we undertake no obligation to update them.

A reconciliation of any non-GAAP financial measures referenced in today's remarks is included in our earnings press release available on the Investor Relations section of choicehotels.com.

Joining me this morning are Pat Pacious, our President and Chief Executive Officer; and Scott Oaksmith, our Chief Financial Officer. Pat will discuss our business performance and strategic progress, and Scott will review our financial results and outlook.

And with that, I'll turn the call over to Pat.

Thank you, Allie, and good morning, everyone. We appreciate you joining us today. We delivered first quarter results in line with our expectations, signaling an inflection point in underlying trends toward rooms growth, RevPAR improvement and lower capital intensity. The work we have done over the past several years has now positioned us as a more accretive asset-light growth model with significantly lower capital intensity and stronger unit economics, which is reflected in the continued expansion in our average royalty rate. Taken together, this supports more consistent earnings growth and increasing returns to shareholders.

At Choice, our strategy is built on a straightforward, repeatable model, improving franchisee economics drives demand and rooms growth, which we convert into higher quality earnings and free cash flow. We reinvest that cash in high return, capital-light opportunities and return excess capital to shareholders in a disciplined and increasingly predictable way. We are now seeing this translate more clearly into our results.

First, U.S. net rooms growth is inflecting and improving sequentially with gross openings up 32% year-over-year, first quarter hotel openings at a 5-year high and exits at their lowest level since 2023. Our U.S. pipeline is also expanding sequentially, providing greater visibility into future growth. At the same time, our international portfolio continues to scale as an additional growth engine.

Second, franchisee unit economics are improving, driven by stronger revenue delivery and lower hotel development and operating costs. This is resulting in stronger returns across the system, reflected in our strong voluntary franchisee retention rate and continued expansion in our average royalty rates with improving RevPAR now flowing through a higher quality, more revenue intense system.

And third, as we move beyond a period of elevated investment that has achieved its strategic objectives, capital intensity is now declining materially with development outlays coming down. As market conditions continue to improve, we intend to accelerate capital recycling, further enhancing our ability to return capital to shareholders, and drive a more consistent capital return profile. We were pleased with the quarter and in the 46 states not impacted by hurricanes, RevPAR was up 1.8% year-over-year, driven by gains in occupancy.

Looking ahead, as we move past last year's hurricane impact, demand continues to benefit from tax refunds and is expected to be further supported by event-driven travel this summer, such as the FIFA World Cup and the U.S. 250th anniversary. More broadly, we are seeing strength across our core segments, supported by several structural trends that are already driving performance today. Affordability remains a key factor in travel decisions, aligning directly with our value-oriented brands and core middle-income customer. And we are seeing continued strength in small and midsized business travelers and group demand. Employment growth continues in sectors such as health care, construction and utilities, driving workforce based travel from customers who rely on our hotels.

In addition, repeat stays from the rising number of retirees and road trips provide a stable base of demand. We are also seeing a shift in guest expectations toward accommodations that feel more like home, supporting strong demand for our extended stay portfolio. Importantly, these are not future tailwinds. They are trends we are seeing in the business today, contributing to a stable and diversified demand base across cycles.

So when you step back, the story is clear. Room growth is inflecting, unit economics are improving and capital intensity is declining, positioning us to deliver more consistent earnings growth over time. Importantly, we believe we are uniquely positioned to capture demand in segments where we have a structural advantage.

Let me build on that by focusing on what is driving the durability of our room growth. Our growth is driven by a conversion-led development model, where we have a clear advantage in speed and capital efficiency. Our brand portfolio aligned with both guest demand and owner returns and improving unit level economics that continue to drive developer demand across our core segments.

Globally, we grew rooms by 1.7% year-over-year, with growth improving sequentially. In the U.S., developer demand remained strong with franchise agreements awarded up 65% year-over-year in the first quarter. We have made meaningful progress in reducing the time from signing to opening, enabling faster revenue generation. In the first quarter, U.S. conversion room openings increased 59% year-over-year, and approximately 60% of franchise agreements executed in the quarter are expected to open this year, providing strong near-term visibility into growth. Importantly, a meaningful portion of our openings come from conversions that never appear in our quarter-end pipeline, underscoring the speed of our model. We also focus on segments where we are structurally advantaged. Extended Stay remains a key growth driver with 11 consecutive quarters of double-digit rooms growth, and now represents more than 40% of our U.S. pipeline. Supported by strong unit-level economics, a dedicated extended stay field organization and a leading hotel pipeline, we are well positioned to extend our leadership in this category.

In mid-scale and economy transient, we are seeing strong developer interest with U.S. franchise agreements awarded up 38% year-over-year and pipelines continuing to build, driven by improving unit level economics and owner returns. As part of our focus on enhancing franchisee returns, we have reduced the cost to build and convert hotels, including lowering prototype costs by up to 25% across key mid-scale brands and simplifying property improvement requirements. A clear example is Country Inn and Suites by Radisson, where the redesigned lower-cost prototype is driving renewed momentum with franchise agreement growth of 50% year-over-year for the brand.

In economy transient, our portfolio strategy continues to improve system quality and guest satisfaction, supporting continued developer engagement with the pipeline increasing 26% sequentially. International continues to scale as an important growth engine with net rooms up 13% year-over-year in the first quarter. In Canada, we are seeing strong early returns following last year's transition to a direct franchising model with net rooms growth of over 30%, the strongest performance in more than a decade, and a pipeline up 55% year-over-year, alongside improving revenue and guest satisfaction. As we continue to enhance the choice value proposition internationally, we see a meaningful opportunity to drive both system growth and stronger franchise economics over time. Our hotel development pipeline remains a powerful engine for future earnings growth.

Importantly, 97% of rooms in our global pipeline are in higher revenue brands, which we expect to be approximately 1.7x more accretive than our current portfolio. Taken together, these trends reinforce our confidence in our ability to deliver durable global net rooms growth, supported by a structurally advantaged portfolio, a high-quality and more accretive pipeline and a development model that enables consistent, capital-efficient expansion.

Turning to unit economics. Our growth is supported by structurally improving franchisee economics driven by enhancements to our revenue generation engine and lower franchisee operating costs. Importantly, the mix of customers we are attracting is becoming more valuable over time. The segments where we are growing, business travelers and groups, generate higher spend per stay while loyalty is driving more repeat stays, together translating into stronger franchisee economics. Loyalty is a key driver of our higher quality demand and customer lifetime value. Our Choice Privileges program now exceeds 75 million members, up 7% year-over-year. Earlier this year, we launched the next evolution of the program, building on the strong momentum we delivered last year through continued enhancements designed to further strengthen engagement and drive repeat stays. We are already seeing this translate into our results, with loyalty contribution increasing over 300 basis points in March year-over-year as new members generated higher revenue per member than prior year cohorts.

In business and group travel, we continue to see strong performance with small and midsized business revenue up 14% and group revenue up 9% year-over-year, supported by recurring event-driven demand such as youth sports. This performance reflects our ability to effectively capture and convert these higher-value demand segments across our platform.

Technology is an increasingly important differentiator for choice. We have a long-standing advantage, having been an early mover in migrating both our infrastructure and data to the cloud, which underpins how we deploy AI across our business. That foundation enables us to move faster, deploy capabilities at scale and translate innovation into real business outcomes for our franchisees. We are already seeing this in action. For example, our recently launched AI-enabled easy bid platform is improving response time to group RFPs by approximately 30%, which is translating into conversion rates that are roughly 250 basis points higher and driving incremental group business for our franchisees. Through our long-standing partnership with AWS, we are the first major hospitality provider in the U.S. to standardize on a common AI foundation, allowing us to move beyond pilots and rapidly deploy capabilities across our business, embedding them across guest experience, franchise operations and distribution. We are also extending these capabilities through our partnership with Salesforce, where we are deploying intelligent agents across our field organization to improve franchisee operations, strengthen how our hotels capture group demand and enable faster, more data-driven decisions, giving us the flexibility to rapidly deploy and scale new capabilities across our platform. Together, these capabilities are improving franchisee returns and driving continued expansion in our average royalty rates.

Looking ahead, Choice is well positioned for continued growth with a clear path to more consistent, higher-quality cash returns. U.S. rooms growth is inflecting. Unit economics are strengthening and capital intensity is declining. With a structurally advantaged higher-quality portfolio of hotels, a more accretive pipeline, a capital-light model and a differentiated cloud-based technology platform, Choice is positioned to deliver durable earnings growth and create long-term shareholder value.

With that, I'll turn the call over to Scott.

Thanks, Pat, and good morning, everyone. Let me start with our first quarter results. For the first quarter, revenues, excluding reimbursable revenue from franchised and managed properties increased 3% year-over-year to $217 million, driven by global rooms growth and expansion in our average royalty rate. Of particular note, international performance was strong, with revenues, excluding reimbursable revenue from franchised and managed properties increasing 63% year-over-year. Adjusted EBITDA was $126 million compared to $130 million a year ago and adjusted earnings per share were $1.07 compared to $1.34 a year ago. The year-over-year decline in adjusted EBITDA primarily reflects the timing of certain SG&A costs. The decline in adjusted EPS further reflects a temporary adjustment to our effective income tax rate in the first quarter. These items were anticipated and are expected to normalize over the balance of the year, consistent with our full year guidance. As a result, we are maintaining our outlook across all key metrics.

Let me now turn to the key drivers of our performance. Three themes shaped our first quarter results. First, U.S. net rooms growth improved, supported by strong openings and lower exits. RevPAR trends improved through the quarter. And finally, capital intensity declined as investment in Cambria and Everhome has achieved the strategic objectives and is now being significantly reduced.

Let's start with our net rooms growth. In the first quarter, we grew global rooms 1.7% year-over-year, led by a 2.5% growth in our higher revenue segments, and highlighted by a 37% increase in room openings. Developer demand remained robust with global franchise agreements awarded up 72% year-over-year. Importantly, in the U.S., performance improved meaningfully with nearly 6,000 gross rooms opened in the quarter, and net exits declined 52% year-over-year and improved sequentially, reaching the lowest level in recent years. As the quarter progressed, hotel development momentum accelerated with March accounting for approximately 70% of first quarter U.S. franchise agreements executed. Growth was broad-based, led by extended stay and strong momentum in mid-scale.

Conversion activity remains a key driver of our growth, expected to account for over 80% of openings for the full year. U.S. conversion franchise agreements increased 63% year-over-year, while the U.S. conversion pipeline grew 17% year-over-year and expanded sequentially, reinforcing our visibility into future openings. Relicensing activity increased significantly year-over-year, reflecting both brand strength and continued franchisee confidence. Taken together, these trends reinforce our expectation that U.S. net rooms growth returns to positive territory in 2026, with sequential improvement already evident in the quarter. International growth also remains robust.

Turning to RevPAR. Our global RevPAR declined 80 basis points year-over-year on a currency-neutral basis in the first quarter, primarily reflecting the lapping of hurricane-related impacts in the prior year. International RevPAR increased 2.6% year-over-year on a currency-neutral basis, led by strong performance in Canada and the Caribbean and Latin American region. In the U.S., excluding a 410-basis-point impact from prior year hurricane-related demand, first quarter RevPAR increased 1.8% year-over-year, supported by sequential monthly occupancy gains, an important leading indicator for future RevPAR performance. On a comparable basis, RevPAR turned positive in February and remained positive in March. Preliminary April trends remain positive, supporting our expectations for continued improvement. Performance continues to trend favorably relative to our expectations, supported by constructive underlying demand.

Moving to royalty rate, a key driver of our earnings growth. In the first quarter, we increased our U.S. average royalty rate by 11 basis points, reflecting continued growth in higher revenue brands and ongoing improvement in our franchisee value proposition. We remain confident in the trajectory of system-wide royalty rate expansion, supported by higher quality pipeline and ongoing investments in demand generation.

Turning to our partnership business, which remains a key priority. Franchisee-facing service offerings included within our franchise and management fees continue to gain adoption during the quarter, driving over 10% year-over-year revenue growth. These offerings are also supporting the continued expansion of our non-RevPAR franchise fees. Partnership revenues were $24.7 million in the first quarter compared to $25.4 million a year ago, primarily reflecting the timing of transactions in certain programs, resulting in some year-over-year variability. We continue to expect partnership service and fees to grow in the mid-single digits for the full year. Together, these revenue streams diversify our earnings base and represent an attractive high-margin growth opportunity over time.

Turning to capital. A key component of our strategy is the meaningful reduction in capital intensity as we move beyond the peak investment phase for Cambria and Everhome, both of which have now reached the scale to support ongoing asset-light expansion. Importantly, large-scale balance sheet-intensive brand incubation is no longer central to our model as we shift towards more capital-efficient ways to grow and scale our brands. With strategic objectives achieved, and peak investment winding down, capital deployment is declining and capital recycling is expected to increase materially. In the first quarter, we generated approximately $25 million of proceeds and reduced development outlays by 51% year-over-year, and we remain on track for net capital outlays of approximately $20 million to $45 million for the full year, approximately 70% lower at the midpoint than 2025 levels.

As hotel transaction activity improves, we expect additional opportunities to accelerate capital recycling, further expanding capital capacity. We ended the quarter with total liquidity of $474 million and net leverage of 3.2x adjusted EBITDA, comfortably within our targeted leverage range of 3 to 4x, and providing strong financial flexibility. In the first quarter, we used $23.2 million of cash in operating activities, primarily reflecting working capital timing and higher franchise agreement acquisition costs associated with a 37% year-over-year increase in global room openings. Operating cash flow is tracking in line with our expectations with variability driven by seasonality and timing. Our capital allocation framework remains disciplined and unchanged. Our first priority is to deploy capital to high return, capital-light organic investments that strengthen our brands and enhance franchisee economics, including our revenue engine and scalable technology capabilities. We then support a stable dividend.

Finally, we returned excess free cash flow to shareholders, primarily through share repurchases, supported by our expected free cash flow generation and consistent with our targeted leverage range. As part of our increased focus on shareholder returns this year, we are providing greater visibility into our capital return profile. We expect to repurchase between $175 million to $225 million of shares in 2026, supported by expected free cash flow generation and strong balance sheet capacity. Year-to-date through March 31, we returned $75 million to shareholders, including $62 million in share repurchases with 2.3 million shares remaining under our current authorization. Our disciplined capital allocation approach, together with the strength of our asset-light business model, positions us to improve free cash flow conversion, excluding franchise agreement acquisition costs over the next several years, moving towards 60% to 65%.

Before we open up for questions, I'll briefly cover our expectations for the remainder of the year. For full year 2026, we are maintaining our guidance across all metrics, including adjusted EBITDA of $632 million to $647 million and adjusted diluted earnings per share of $6.92 to $7.14. Our outlook reflects continued growth across higher revenue hotels and markets, royalty rate expansion, sustained international momentum and further contribution from partnership and non-RevPAR revenues. It also reflects continued cost discipline with adjusted SG&A expected to grow in the mid-single digits, supported by operating efficiencies across the business, including the scaling of AI-enabled tools. Our outlook excludes the impact of any additional M&A, share repurchases completed after March 31 or other capital markets activity. As we look ahead, we are well positioned to deliver more consistent earnings growth and stronger free cash flow, supporting long-term shareholder value.

With that, Pat and I are happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of David Katz with Jefferies.

I'd like to just sort of talk about the aspirational levels of NUG out into the future, yours compared to sort of the peer set. What do you think the levers are? What do you think the prospects are? And how do you see Choice getting to accelerate NUG in the future?

David, great question. I mean when we look at our net unit growth, I mean, obviously, we saw in the quarter a sequential improvement as you know, very well. We are a conversion-led model, and that's really been the driver of growth and the speed and efficiency with which our conversion pipeline is moving. As we mentioned in the script, the conversion pipeline is up 17%. Franchise agreements are up 65% overall. And when we look at that visibility, it gives us a lot of confidence that this sort of inflection point that we're seeing in that rooms growth is happening. Keep in mind, the new construction environment has been very muted given the interest rate environment. So as we see new construction come back, those brands that rely primarily on that, we can see an acceleration in our net unit growth into the future.

So we feel really good about the inflection point that we've seen, particularly here in the U.S. We feel good about where the franchise agreements sold last year and again into the first quarter are and the fact that their conversions for the most part, really gives us a lot of visibility and confidence in getting those openings done this year.

Okay. And any -- just to sort of double back on a portion of my question. Is there a future at some point where NUG is a, call it, low to mid-single-digit number. And -- or should we look at this conversion-led model in a different context.

No, I think it is possible to get back to those levels that you're talking about when the new construction environment comes back. We are seeing, obviously, an acceleration in the extended stay segment. That has continued to be strong. I think as new construction comes back, that will only get larger. We've been kind of, as an industry, doing much more on the conversion side of the house. And I think the lack of supply growth will incent developers to come back as well as RevPAR strengthens into the future. So we do see an underlying trend in the future that can get us back to those higher levels.

And the next question comes from Daniel Politzer with JPMorgan.

This is Michael Hirsch on for Dan today. A question on consumer health, especially given the rising fuel prices in the U.S. Have you seen any impact on your bookings or more broadly to consumer sentiment?

Actually, Michael, we've seen kind of the opposite with what has happened in the Middle East that started in March, carried into April. And as we said in our remarks, March was a very strong [indiscernible] from our perspective...

You are now joining the meeting.

Are you still there, Michael. Operator, do you still have us on the call?

Yes. Please go ahead.

Okay. Michael, are you still there?

Yes, I'm here.

Okay. Sorry, there was a bit of a disruption there. Yes, I mean, I think we look at that -- the consumer has been pretty resilient given the rise in gas prices. We saw higher gas prices back in 2022. And that really didn't temper demand. As I said, we've seen in the last 2 months, a continuing strength in the consumer. I think the other things that give us a lot of positive feeling going forward is really the affordability trend that's going on in the country, that aligns very well with our value-oriented brands. We're seeing a shift in the workforce, as we mentioned in the remarks. You're seeing employment growth in sectors where people have to travel to do their work, and those travelers rely on our hotels. We're also seeing a shift in the way guests want their hotel room to look more like home and that helps our extended stay hotels. And then as we've talked on prior calls, we continue to see a rising number of retirees who have discretionary income, discretionary time. And we know we over-index on that type of guest as well. So we feel pretty good about the underlying trends that are supporting the RevPAR projections that we have for this year.

And just a follow up on Pat's point, when you really look at our business travel, it was really strong during the quarter. Overall, business travel was up 3%. And particularly, our small and medium business was up 14% and our group's business was up 9%. So really, really good performance during the quarter.

And a quick follow-up on what Pat mentioned. For U.S. RevPAR, understanding the first quarter was impacted by the hurricane comparison. What are your expectations for U.S. RevPAR in the second quarter and second half of the year? And are there any other calendar considerations that we should keep in mind?

Yes. We're encouraged by the strengthening trends we saw throughout the first quarter and really saw occupancy strengthen, and that positive momentum really continued into April. At the same time, we're still early in the year and being mindful of the broader macroeconomic environment. So while performance has been trending favorably relative to our expectations, we believe it is prudent to remain cautious and we've upholded our current guidance. But should the economy continue to perform well and these macro risks recede, we think we're well positioned to trend towards the higher end of our forecasted range. But for now, we believe a more measured approach is in our best interest.

And the next question comes from the line of Michael Bellisario with Baird.

First on the RevPAR underperformance I get that the hurricane impact in retrospect was greater than you thought, but maybe help us with the 2-year stack. I mean, I presume your hotels lost market share. So I guess maybe why do you think that was the case? And then when do you think that ultimately starts to recover for at least those affected hotels?

Yes, Michael, I think if you look at a couple of things. The first is the key point in all of this is occupancy. We talked about this on the last call. We saw a strength of that indicator all last year, and that grew again in the first quarter. So we are seeing demand come back into the hotels, and that's a really strong fundamental for the cycle to shift and move in the right direction and make it durable. Then on top of that, as owners get more comfortable with the demand environment, they raise price.

I think the other thing that's important to note is when you open 6,000 rooms in a quarter, the ramping of that as well has an impact on RevPAR. So as we said, we're very comfortable with the RevPAR projections that we have for the full year. And I think as you think about the openings and the sort of more occupancy driven, with rate and following, that's how we kind of look at how the first quarter shaped up when you take the hurricanes out. Just for a reminder, about 20% of our portfolio sits in those 4 states that were impacted by the hurricane. So it had a very significant effect on our Q1 numbers for last year. So as we look into April and beyond and that dissipates, I think it will be a much more easier comparison year-over-year.

Just to put a finer point on that. When you look at the various regions outside of that South Atlantic where those 4 states are, every region had positive RevPAR throughout the quarter, so up about 1.5% to 2% across all the quarters. So really was a regionalized hurricane impact to our results. And as we said in our prepared remarks, if you pull out the hurricane impact, actually, the entire system was up about 1.8% for the quarter.

Okay. That's helpful. And then just sort of real time, I mean, stock down 14%. I mean, market doesn't like surprises. That's what we got today. So I guess, how do you plan on handling communication, better telegraphing some of the moving pieces in the model on a go-forward basis? Any kind of color or commentary there would be helpful.

Yes. I think we're -- like we said, we're very happy with the improving underlying trends that we're seeing. We're seeing unit growth inflecting. We're seeing RevPAR improving, capital intensity declining. We've been -- these are all things we talked about on the February call. And while the financial results were in line with our expectations, really the underlying trajectory of the business is much stronger than the quarterly year-over-year comparison suggests. So I think when you look at it on that front, we're going to keep communicating the positive story that we have and the results that we're achieving.

And the next question comes from the line of Patrick Scholes with Truist Securities.

Question for you regarding market share. I know when in COVID coming out of COVID, you're pretty vocal and granular when you were receiving market share gains. I want to go back and look at the transcript from you had 400 basis points of year-over-year market share gain. Along that same line, what was your market share change year-over-year versus last year in the most recent quarter?

Yes. In terms of index, I mean, if you take out those hurricanes states that we mentioned, we were generally in line with the performance in the various local markets that we're in. So obviously, the heavy skew, as Pat mentioned, of our portfolio that is in those 4 states, about 20% of our product. That has skewed kind of our comparisons when you look at the overall STR numbers. But when you look at it on a localized basis, we're in line with the performance of the overall segments that we perform in those local markets.

Okay. But let's not take those out, what would it be for the whole portfolio?

Well, as we mentioned, the hurricane had about a 400 basis point impact. So if you look across the chain scales, obviously, that -- our performance and we outperformed, I think, our competitors in those markets, certainly pulled down the overall results. But as I said, outside of those numbers, we feel really good about the way our hotels are performing against our local comp.

Okay. So I can't get a number like you had given before. Is that correct?

Well, it really is by segment, Patrick. So creating a broader, I think, in the past, we have given some of the RPI gains against the various segments that we operate in economy, scale up or midscale. So we don't have those to provide today, but certainly happy to follow up with that.

Okay. It would be helpful. Just because when it goes up, we hear the good number and then we go down, we don't get a number. So I'll follow up later.

And the next question comes from the line of Robin Farley with UBS.

Two questions. One is just looking at what we see from not only the STR numbers, but some other companies raising RevPAR guidance for the remainder of the year. I understand the hurricane comps were an issue. It sounds like that would have dissipated by now in April. Is there anything else from a geographic perspective other than the hurricane issues in Q1, which sounds like we're not continuing. Is there anything else from a geographic perspective where why choice wouldn't participate in maybe this better outlook than how things looked at the start of the year? That's one question.

And then if I could also ask your -- the line for equity and loss of affiliates, some of those losses have been coming in bigger, I understand that Canada now you wholly own and so there was a shift there. Is there like development spend? Or what other things are making that line look like maybe a heavier loss than it had been historically.

Yes. Robin, I think it's important to also remember, Q1 is one of the lowest contributors from a travel perspective for our type of travelers. So that's also kind of playing into why we maintain our RevPAR guidance. As we said, we're seeing very positive trends, particularly in March and April. It's occupancy driven, which is critical from the standpoint of durability, and we feel really good about that. But it's one of the quarters that contributes least. As we get into Q2 and Q3, where we have much more of that summer drive travel this year, in particular, we've got the event-driven travel. I think you'll see that pick up and we'll be able to kind of give a clearer view into the rest of the year at that point.

And just put another point on that. In terms of April performance, we are now past the hurricane impact that dissipated probably about the middle of March last year. So our preliminary results in April are positive. Underlying trends that we saw in March outside of the hurricane states have had pulled through in April. So we are pleased with the underlying trends. And as we said, there are some more macro uncertainty that's out there. But absent that, we feel like we're more performing towards the higher end of our guidance on the RevPAR, assuming this continues.

In terms of your question around the equity gains and losses, those are really reflective of some of the development we're doing with the Everhome properties. So we had several properties open over the end of Q4 and the beginning of Q1. So really just the timing of ramping of hotels that's reflected through there. As we mentioned earlier, we are at the back end of the investments that we've done for Everhome and for Cambria now that both of them have met their strategic objectives. And so you'll see a meaningful step down in the capital intensity of our investments there. And as those hotels ramp up, those losses will turn to profits as they are fully ramped.

And the next question comes from the line of Stephen Grambling with Morgan Stanley.

Just maybe a follow-up there on the international front. Just as that started to ramp up and becomes a bigger part of the base, how do you think about the contribution from a profitability standpoint? Is there a certain number of rooms or certain pockets that you need to see get to a certain level before that can become more meaningful in terms of real EBITDA contribution?

Yes, Stephen, I think it's -- the significant change was the shift to more of a direct franchise model. Taking MFA markets, master franchise agreement markets and turning them into direct franchise markets where the contribution is significantly higher, the margins are higher, the royalty rates are higher. So it's really a story around looking at the markets where we feel like it's more opportunistic for us to be or strategic rather for us to be in that geography in a more direct franchise world as opposed to what we might have been doing prior to that. So the shift is really, I think, exciting because we've got today about 10% of the EBITDA being driven by the international business. And we're really starting to scale that up, particularly here in the Americas. And so we do see that becoming a much bigger contributor over time.

Yes. We're really pleased with the Canadian acquisition that we have executed last year and really saw strong results from that our Canadian operations during the quarter with RevPAR up a little over 5%. Our rooms growth there was about 3.5% and the pipeline is up 55%. So really I'm optimistic on the growth in that new market for us.

Maybe one other follow-up. It could be related, but from a free cash flow standpoint, at this point on a TTM basis, it looks like even including some disposition proceeds, you're at about $50 million. What are some of the kind of one-offs that we should be thinking about and how to think through kind of the trajectory of free cash flow. Is there still some spend that we've got to get through before we see that accelerate?

Yes. We do have some timing issues in the quarter, which had pulled down our operating cash flow slightly, and our key money was slightly higher from Q1 to 2025 to Q1 2020 (sic) [ 2026 ], but that was really driven by a 37% increase in the room openings compared to the prior year. And additionally, the mix of hotels opening really shifted with a strong growth in our more accretive segments that have really strong returns, which further contributed to a slightly higher key money disbursement.

What we really look at is this is really a timing. Our algorithm in terms of free cash flow remain intact for the remainder of the year as we kind of continue to move back towards that historical 60% to 65% free cash flow conversion. On the balance sheet investments, really strong quarter where net -- our outflows were down 50%, and we were actually net recyclers of capital during the quarter with about $4 million net back to choice where we spent about $40 million the year before. So we expect that to continue to meaningfully step down. We expect net outflows to be down about 70% year-over-year. And as the transaction market improves, we do see opportunities for us to accelerate the recycling of that capital by selling hotels encumbered with long-term franchise agreements.

The next question comes from the line of Brandt Montour with Barclays.

Great. So I wanted to circle back to AI. You guys mentioned it. in the prepared remarks. It seems like everybody in your space is sort of in a race right now to roll out apps and apps and other AI-based search technology to try and sort of enhance direct bookings within the top of the funnel and the customer journey overall. Can you just sort of give us the business state of the union in terms of where you are in terms of rolling out that tangible technology versus your peers?

Yes, it's a great question. And for us, technology has always been a structural advantage for us. We're the -- I believe, probably the only company that has both our infrastructure and our data all in the cloud. And those are 2 key ingredients to be able to bring AI to the enterprise at a scaled level. We see it as really driving our franchisee economics. We mentioned easy bit in the remarks. I mean that is a tool that is already providing meaningful results to our franchisees from a revenue -- top line revenue perspective, and it's cutting their costs. So the unit economics is really where we are placing a big bet for us. And I think there's industries and companies where they're throwing out thousands of agents and hoping 1,000 flowers will bloom. We've kind of taken a very direct and purposeful approach to how we're going to use AI to drive the unit economics of our hotels.

To your point about the customer journey, we are definitely, as we've talked in the past, leaning in with OpenAI and Google. We are working with some of the other large language models to make sure our hotels appear in the answer engines. And that's a lot of test and learn that's going on in the industry itself. But we've kind of taken a different approach, I think, by making early investments a number of years ago that have really allowed us to bring these AI tools to our franchisees at scale that are now driving real results for them. And the deployment is just incredible and the adoption rates we're seeing from our franchisees are enormous, much higher than sort of prior rollouts of tools.

And next week, we'll have all of our franchisees together in Las Vegas. A lot of that time will be spent having them roll up their sleeves and really engage with these new tools we're rolling out. We're pretty excited by the upside we're going to see with both the unit economics of our hotels and then things that we're going to be able to do here at corporate to really drive higher productivity and lower costs. So it's really kind of a hitting on 3 levels, that consumer what we're doing for franchisee economics and then what we're doing here to run our business more efficiently.

Okay. Great. And then just a follow-up on demand, back to one of your comments, the reason why you guys didn't raise guidance for RevPAR was because of -- and I don't want to put words in your mouth, you said sort of cautiousness around the macro and reason to be prudent. And I'm just trying to put those comments with the earlier comments that the U.S. -- that you see the U.S. inflecting. And so I guess, what is there in terms of macro tail risk within the domestic travel picture, if anything at all or if it's sort of kind of the unknown unknowns when you say macro.

Yes. I would put it. That's a great way to put it. It's more of the unknown unknowns. I mean I think we've been through a couple of years as an industry where nobody had certain things on their bingo card at the beginning of the year when they put their forecast together. We've seen the airline industry and travel in general be significantly impacted by government shutdowns and tariffs and all kinds of things that we're not in anybody's forecast.

So I think we look at our business, we're really 3 months in and now know we have some good visibility into April. But rather than kind of get ahead of our skis here. We feel good about the RevPAR range we have, which is fairly wide. But it's a -- just given our trajectory and the close-in booking window that we have, so the visibility from a RevPAR for us is slightly different than maybe some industry peers. So we wanted to be very prudent in taking a look at our RevPAR and thinking about that whether or not to raise it or not was a decision we -- a discussion we had, but ultimately decided the prudent decision was to keep it where it is.

And the next question comes from the line of Trey Bowers with Wells Fargo.

Just following up a little bit on the cash flow dynamics. The key money outlay in the quarter due to the really solid gross additions. Is that still kind of going to expect to be in that kind of $100 million, $110 million range this year? Or is the fact that you guys are doing better than expected on gross additions, just going to raise that number?

And then longer term, as we look forward, should we think about kind of a tie ratio of gross room or hotel adds to key money that the more success you have that key money will kind of grow with that? Or are there dynamics there that might come down even with a better NUG environment?

Yes. To answer your first question, no change to our overall outlook for key money spending for the year. Really, this was timing-related compared to the prior year with the really strong openings, which were in line with our forecast at the beginning of the year as we have been talking about really the inflection in U.S. rooms growth. So nothing to change there. In terms of an algorithm, really every key money deal is underwritten on a deal-by-deal basis, and it really depends on the strength of the deal, where we're putting the brands on in the overall environment. So there isn't a one-to-one relationship in terms of number of openings and key money for future. So I believe as the new construction environment starts to rebound, the RevPAR environment gets -- starts to improve over the next couple of years. I actually think you'll see key money per deal step down more meaningfully as that money isn't needed to help defray the cost of building a hotel or switching hotels. So something we monitor closely. We're very pleased with the overall returns we get when we do use key money, but it's really a market condition dynamic of how much will be used based on how many openings we have.

[Operator Instructions] The next question comes from the line of Meredith Jensen with HSBC.

Just a quick follow-up on what Brandt asked around AI. As I think your particular take is unique given your background in technology. And I would be really interested if you might speak or unpack a little bit more on your comments about being -- having a more narrow or strategic focus than some of the discussions we're hearing. And is that given you might have a view on how much the economics of AI might end up being over time? Or that the scalability is less knowable now and you've seen that before? Just some more comments on that would be great.

Yes. Meredith, it's an interesting sort of pivot point that I think companies have to make. At Choice, our history has always been to invest in technology that we can scale to our 7,500 hotels. And what we are really seeing with AI is the ability to do that in a much more accelerated fashion. When you look at what we're doing, we've put out press releases about kind of really deepening our partnership with AWS. The reason for that is to deploy these things at scale, you have to build the scaffolding in order to do it. and relying on a partner who we've already got our infrastructure in the cloud with who works with us kind of behind the scenes on sort of more experimentation and an improvement in the software development life cycle. We do develop proprietary tools. We just see an opportunity here to really drive higher productivity out of our current workforce in a way that's going to bring some pretty, I think, significant change to our franchisees' operating models. And that's why we really have been talking about the franchisee economics, that kind of 4-wall EBITDA for our hotels is probably going to increase in a significant way because of AI. We think about these tools in the past, as it would tell you what happened last week or last night in your hotel, they're moving to a place where their teammates to tell you what's your next best action. How many people do I have checking in, how many Choice Privileges members are coming in next week plan for that. These types of things are speeding up, and we're really seeing these tools deliver meaningful value to our franchisees.

And so that's why we've sort of taken the approach of focusing our efforts. The other thing people don't talk about is AI isn't free. Tokens cost money. And so as you think about the cost of your approach to deploying AI you have to be measured in that as well. So that's kind of the way we've approached it. As I said, we just shared 1 example in the script of something that's already deployed. But that was built and deployed in a very rapid fashion and the adoption rate by franchisees is significant. So that's the type of thing that we think we're going to see is just an acceleration of these tools being deployed in a place where our franchisees who, as you know, are small business owners, these things bring meaningful value to them and drive their returns higher.

That's really helpful color. And maybe one since you touched upon it on the loyalty program. I know you had a pretty big refresh that launched earlier in the year. And maybe if you could just speak a little bit more about the momentum you're seeing in engagement, changes in redemptions rates given you gave people, I think, extra flexibility and sort of what we're seeing in terms of new opportunities that, that new card program might unlock?

Yes. So kind of tapping into the theme of affordability, which our franchisees or our guests rather are telling us they want. We really looked at it and did -- we're kind of pursuing a counter strategy here to make the points more valuable, not less. And so what we call Rewards Within Reach. So you get something after 5 nights as opposed to 10 nights. So bringing that in. And that meets where our customer where they are and the amount of travel that they do. As we said in the script, we've seen a 300 basis point increase in loyalty contribution in the first quarter. We're seeing more members, and we're seeing more revenue per member.

So we're really excited about the refresh that we've done and the upside it can bring to bring that sort of loyalty program or a member who's a repeat stayer. We know they stay more often and we know they spend more when they travel. So it's the right type of demographic for us to continue to grow and to keep that part of our revenue engine refresh and move it in the right direction.

And we have no further questions at this time. I would like to turn it back to Pat Pacious for closing remarks.

Well, thank you, operator, and thanks, everyone, for joining us this morning. We look forward to speaking to you again in August when we report our second quarter results. Have a great rest of your day.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions]. I will now turn the call over to Allie Summers, Senior Director of Investor Relations.

Good morning, and thank you for joining us. Before we begin, please note that today's discussion includes forward-looking statements as defined under U.S. securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied.

For more information, please refer to our filings with the SEC, including our most recent forms 10-K and 10-Q. These statements speak only as of today, and we undertake no obligation to update them. A reconciliation of any non-GAAP financial measures referenced in today's remarks is included in our earnings press release available on the Investor Relations section of the choicehotels.com.

Joining me this morning are Pat Pacious, our President and Chief Executive Officer; and Scott Oaksmith, our Chief Financial Officer. Pat will discuss our business performance and strategic progress, and Scott will review our financial results and outlook.

And with that, I will turn the call over to Pat.

Thank you, Allie, and good morning, everyone. We appreciate you joining us today. In 2025, we delivered adjusted EBITDA of $626 million up 4% year-over-year and grew adjusted earnings per share, both in line with our expectations. These results reflect the continued strength of our higher revenue brand mix, accelerating earnings contribution from our international portfolio, robust group demand, business travel growth and sustained momentum across our partnership revenue streams.

2025 was also a year of meaningful progress in advancing our long-term growth strategy. We delivered 14% year-over-year growth in global hotel openings, expanded our international footprint at a double-digit pace and further strengthened our leadership position in the attractive extended stay segment, achieving record U.S. openings.

When we look at our existing hotels, the success of our overall strategy to improve product quality and strengthen franchisee economics can best be seen in the higher average royalty rate we were able to achieve across the U.S. portfolio, which increased 8 basis points in 2025 and 10 basis points in the fourth quarter.

On the consumer front, we are particularly excited by the recent launch of the next evolution of our Choice Privileges loyalty platform and the launch next quarter of a dedicated digital platform for small and midsized businesses. Our hotel development pipeline remains a powerful engine for future earnings growth, supported by strong developer interest with global franchise agreements awarded up 22% year-over-year in 2025.

Today, 97% of rooms in our global pipeline are in higher revenue brands, and these projects are expected to be roughly 1.7x more accretive than our current portfolio, driven by RevPAR premiums, higher average royalty rates and larger average room counts. Importantly, our advantage is not only pipeline quality but execution speed.

Our conversion-led model accelerates openings and revenue realization with certain hotels opening without ever appearing in quarter end pipeline metrics. That execution strength is especially evident in the U.S., where pipeline conversion rooms increased 12% sequentially from September 30, 2025. Our conversion engine remains a key differentiator for choice, enabling those hotels to open about 5x faster than new construction hotels.

In the fourth quarter, U.S. conversion franchise agreements increased 12% year-over-year, and we expect conversion activity to be a core driver of improving U.S. net room growth in 2026. As we indicated on our last call, we have been actively optimizing our U.S. portfolio throughout the year with developer demand remaining constructive including full year U.S. mid-scale and economy franchise agreements up 5% year-over-year.

We accelerated the select exit of underperforming hotels in the fourth quarter. These properties generated royalties well below our portfolio average and ranked predominantly in the bottom quartile of guest satisfaction within their brands. This improving portfolio mix strengthens the system's earnings profile and positions us to backfill those markets with higher quality hotels that deliver stronger unit economics for owners and more durable long-term growth for shareholders. With a larger hotel conversion pipeline and a higher volume of conversions expected to open in 2026 and based on current year-to-date trends, we believe U.S. net rooms growth is positioned to return to positive territory this year. Looking ahead, we're increasingly constructive on U.S. lodging demand in our segments.

Our core customer continues to prioritize travel within their overall spending with a clear focus on affordability. Choice has long been strategically positioned at the center of value-driven travel. And in the current environment, that consumer recognition supports our ability to capture incremental share within the segment. As gas prices have declined to their lowest level in 5 years, bringing them back within pre-pandemic ranges, road trips are becoming more budget friendly for our consumers.

In addition, tax relief expected to reach middle-income households this year has historically provided significant stimulus for travel within our segments. Importantly, the timing of the relief aligns with the start of the summer travel season the most meaningful period for our owners.

Furthermore, upcoming national events, including the 2026 FIFA World Cup, the U.S. 250th anniversary, and the Route 66 Centennial provide additional demand catalysts. More broadly, we are benefiting from a limited new supply industry backdrop and steady workforce based travel demand tied to infrastructure, manufacturing and data center investments alongside favorable long-term demographic trends. With expected continued demand growth in several of our strong consumer segments, including retirees, Roadtrippers and America's blue and gray collar workforce, combined with an improved portfolio of purpose-built hotels to serve them, we believe Choice is well positioned to capture this demand and deliver durable long-term growth.

Turning to our business outside the U.S. We've used specific international markets as an increasingly important driver of our growth. And in 2025, our international business delivered exceptional results. Over the past several years, we've deliberately built the foundation for scalable, high-return international growth.

Today, directly franchised rooms represent more than 40% of our international portfolio. That number is up over 20 percentage points over the past 3 years, materially enhancing earnings per unit and overall economics. With that foundation in place, momentum accelerated in 2025. We delivered 37% growth in international revenues, driven by portfolio expansion and positive RevPAR growth across every region. We expanded our international system by 13% year-over-year to approximately 160,000 rooms, outpacing our prior growth assumptions, supported by an 82% increase in hotel openings.

In the Americas outside the U.S., RevPAR increased 5.4% year-over-year in 2025. Within that region, Canada remains a key focus with the rooms pipeline growing 49% year-over-year. As we continue to enhance the Choice value proposition in Canada under our direct franchising model. We see a meaningful opportunity to drive both system growth and stronger franchise economics over time.

In EMEA, rooms increased 13% year-over-year to approximately 70,000 and including nearly doubling our footprint in France through direct franchising. Taken together, our international business is entering its next phase with greater scale, stronger unit economics and a meaningful runway for sustained growth.

Another important growth engine for us is the U.S. Extended Stay segment. In the fourth quarter, we delivered our tenth consecutive quarter of double-digit system growth. Today, the extended stay segment represents more than 40% of our U.S. pipeline and is characterized by longer average days higher margins for owners and greater earnings stability across cycles.

In 2025, we achieved a record number of U.S. extended stay hotel openings up 8% year-over-year, driven by our Everhome Suites brand. Despite a challenging construction environment, we ended the year with approximately 57,000 extended stay rooms in the United States. With continued investment in manufacturing capacity and data center infrastructure nationwide and the largest under-construction hotel pipeline in the economy and mid-scale extended stay segments we believe Choice is well positioned to extend its leadership in this structurally resilient category.

Our portfolio strategy is also strengthening our economy brands. Our guest satisfaction scores improved significantly across the segment. And as quality improvements take hold, we are replacing lower-performing assets with higher quality, more profitable hotels enhancing brand equity across the category. As a result, our economy transient hotels outperformed their chain scales in RevPAR and gain RevPAR index share versus competitors in 2025. That performance reinforced developer confidence with our U.S. economy transient rooms pipeline expanding 6% quarter-over-quarter and U.S. franchise agreements awarded up 13% year-over-year in 2025. These trends are expected to drive improvement in the segment's net room growth trajectory.

In our mid-scale segment, developer interest remains strong with global franchise agreements awarded up 14% year-over-year in 2025. The redesigned Country Inn & Suites by Radisson prototype optimized for cost efficiency and conversion flexibility has reinvigorated the brand, driving a 50% increase in U.S. franchise agreements in 2025 and expanding the U.S. pipeline by 18% year-over-year. With that momentum and a compelling owner value proposition, we believe the brand is well positioned for growth in 2026.

Let me now turn to the efforts we are focused on that are strengthening franchisee economics and driving higher customer lifetime value. Among our targeted investments, 2 key areas are business travel and guest loyalty. In business travel, we've expanded our global sales capabilities and deepened relationships with corporate accounts. Business travelers now represent roughly 40% of total stays, supporting a balanced mix across cycles.

In 2025, group revenue increased 35% year-over-year and small and midsized business revenue grew 13%, led by resilient sectors such as construction, utilities and high-tech manufacturing. Our AI-enabled RFP tools are accelerating hotel responsiveness and driving high-value bookings. And next quarter, we expect to launch a dedicated digital platform for small and midsized businesses, targeting an estimated $13 billion addressable opportunity.

We also continue to elevate the lifetime value of the guests we serve. Today, half of our U.S. guests have household incomes above $100,000 and 1 in 5 exceeds $200,000, an increasingly attractive customer base for our franchisees and partners. Loyalty remains a powerful driver of customer lifetime value. Choice Privileges now exceeds 74 million members, up 7% year-over-year with international enrollment up 11% in 2025, our strongest year internationally. Our most loyal members stay nearly twice as often, spend more per say, and are significantly more likely to book direct.

In January 2026, we launched the next evolution of Choice Privileges, broadening how members earn and engage. We introduced a faster path to status by reducing night thresholds and added a spend-based pathway that allows co-brand card usage to contribute toward elite qualification. We also introduced a new top-tier status and added return and earned bonuses to encourage additional stays within the same year, reflecting research that shows our travelers value more frequent, and attainable recognition. Together, these enhancements are designed to increase repeat frequency and deepen co-brand card engagement, enabling Choice to capture a greater share of demand within our core customer base.

Early indicators are encouraging with post-launch enrollment trending at a faster rate than last year. We are also actively expanding how travelers discover and book our hotels by partnering with leading technology platforms as AI reshapes travel search and booking behavior. We are collaborating with companies, including Google, on its AI-powered travel planning capabilities and open AI through participation in its ChatGPT advertising pilot, among others.

Early engagement in these emerging channels strengthens our distribution and positions us to capture incremental demand and remain highly visible as consumer search behavior continues to evolve. As we look ahead, Choice is well positioned for continued growth. Our disciplined execution, technology forward strategy, an asset-light fee-based model continued to generate substantial free cash flow enabling us to reinvest in high-return initiatives while delivering value to shareholders.

With a higher quality portfolio, a more accretive development pipeline, expanding international business and targeted investments that strengthen franchisee economics and guest lifetime value, we believe choice is positioned to grow market share and deliver durable earnings expansion.

With that, I'll turn the call over to our CFO. Scott?

Thanks, Pat, and good morning, everyone. I will cover 3 areas this morning. Our fourth quarter and full year 2025 financial results, our balance sheet and capital allocation priorities and our outlook for full year 2026. For full year 2025, we delivered adjusted EBITDA of $626 million, up 4% year-over-year and in line with the midpoint of our guidance range. Adjusted earnings per share for the full year were $6.94 per share, also in line with the midpoint of our guidance range.

Growth was driven by our continued leadership in the higher revenue extended stay segment robust average royalty rate, significant expansion of our international business and strong partnership revenue performance. These results reflect the strength of our diversified revenue streams and the early returns from our targeted strategic investments.

In fourth quarter 2025, revenues, excluding reimbursable revenue from franchised and managed properties increased 2% year-over-year to $234 million, adjusted EBITDA was $141 million and adjusted earnings per share rose 3% year-over-year to $1.60.

Let's turn to the 3 key drivers of our royalty fees, rooms growth, RevPAR performance and average royalty rate. In the fourth quarter, we grew our global rooms 0.5% year-over-year, led by a 1.2% growth in our higher revenue segments and highlighted by a 42% increase in hotel openings. In the U.S. we opened more than 22,000 gross rooms during the year, and our conversion pipeline increased 7% year-over-year as of December 31. This healthy level of openings and development activity provided us flexibility to accelerate select hotel exits.

From an economic standpoint, the trade-off is clear. In 2025, hotels that exited the system generated U.S. RevPAR more than 20% below the company average. Improving portfolio mix enhances long-term earnings quality and positions U.S. net rooms growth to return to positive territory in 2026. We also saw continued strength in franchisee retention with U.S. contract renewal activity in 2025 matching prior all-time highs, reflecting sustained confidence in the Choice brands.

Across our focus segments in the fourth quarter, developer interest for our extended stay brands remain robust, with 26% growth in global extended-stay franchise agreements year-over-year. As of today, we have 27 Everhome Suites hotels opened in the U.S., including 18 opened during 2025, and with 38 additional projects in the U.S. pipeline.

In mid-scale, we increased global hotel openings by 47%. We also executed 18% more global mid-scale franchise agreements year-over-year, driven by our quality in Country Inn & Suites by Radisson and Sleep brands. In the upscale segment, we expanded our global roots portfolio by 7% year-over-year, highlighted by 48% more global upscale hotel openings. Our send collection hotel openings increased 58% year-over-year, and the brand now exceeds 75,000 rooms worldwide. In the U.S., we more than doubled Radisson franchise agreements year-over-year and grew rooms pipeline by 32% quarter-over-quarter.

I also want to recognize our teams for completing the integration of our Canadian operations in just 6 months. We transitioned the business to a direct franchising model enabling franchisees to fully leverage Choice's commercial platform while enhancing our effective franchise agreement economics over time. We are already seeing early momentum on the development front, including a recent multi-unit agreement for approximately 700 upscale Ascend collection rooms in Quebec.

Turning to RevPAR performance. Our global RevPAR declined 4.6% year-over-year in the fourth quarter on a currency-neutral basis. As discussed on the prior call, this was driven by the tougher hurricane comparison in the U.S. Southeast from the prior year. International performance remained strong with RevPAR up 3.2% year-over-year on a currency neutral basis. The Asia Pacific region led with 11% growth.

In the U.S., we lapped a 540 basis point hurricane-related benefit from the prior year. Excluding that impact, U.S. RevPAR declined 2.2% year-over-year representing a modest sequential improvement from the prior 2 quarters. Our fourth quarter results were also affected by the government shutdown and continued softness in international inbound travel.

Despite these pressures, we achieved occupancy share index gains versus our competitors on a full year basis, excluding hurricane-related distortions, our U.S. extended space segment outperformed the industry RevPAR by 30 basis points. And our U.S. transient economy segment outperformed its change-scale RevPAR by 80 basis points, while gaining RevPAR index share versus competitors in 2025.

Moving to royalty rate. Our third driver of royalty fee growth. In 2025, we exceeded our full year U.S. average royalty rate guidance, finishing the year up 8 basis points, including a 10 basis point increase year-over-year in fourth quarter. This expansion reflects our success in growing higher revenue brands and the continued improvement in our franchisee value proposition. We remain confident in the upward trajectory of system-wide royalty rates, supported by sustained demand generation investments and development pipeline characterized by higher contracted royalty rates and stronger unit economics.

Turning to our partnership business, which remains a key priority. In 2025, we delivered a 14% year-over-year growth in partnership revenues, including 16% growth in the fourth quarter. Performance was driven primarily by co-brand fees and increased supplier and strategic partnership fees.

As we enhance our franchisee-facing service offerings, adoption remains strong supporting durable growth in our non-RevPAR franchise fees across the broad range of services we provide. Together, these revenue streams have meaningfully diversify our earnings base and represent an attractive high-margin growth opportunity going forward. At the same time, we remain focused on margins through improved productivity and operational efficiency. Adjusted SG&A increased approximately 3% for the full year, in line with our guidance to $283 million, reflecting cost discipline while continuing to invest in strategic initiatives.

Now turning to the balance sheet and capital allocation. We ended the year with total liquidity of $571 million and net debt to trailing 12-month EBITDA of 3x, and we are comfortably within our targeted gross leverage range of 3 to 4x. For full year 2025, we generated more than $270 million of operating cash flow, including nearly $86 million in the fourth quarter. This cash generation, combined with our strong balance sheet, provides meaningful financial flexibility.

Our capital allocation framework remains consistent and disciplined. We prioritize high-return organic investments that strengthen our brands and drive long-term growth. evaluate selective acquisitions where returns are compelling and return excess capital to shareholders. Our dividend reflects a stable recurring commitment, while share repurchases are executed with a disciplined focus, balancing shareholder returns with reinvestment opportunities that meet our return thresholds.

In 2025, we returned $189 million to shareholders, including $54 million in dividends and $136 million in share repurchases. During the year, we repurchased approximately 1 million shares representing more than 2% of our shares outstanding and ended the year with approximately 2.8 million shares remaining under our authorization or about 6% of shares outstanding.

We also continue to deploy capital selectively to scale Cambria Hotels and Everhome Suites while recycling capital at the appropriate time. In 2025, we generated $32 million in net proceeds from recycling activities and our hotel development related net outlays and lending declined $46 million year-over-year to $103 million.

Looking ahead, as both brands approach critical scale milestones, we expect hotel development net capital outlays to continue to decline significantly. This reflects the delivery of our final company developed Cambria hotel in the third quarter of 2026, and our planned tapering of new Everhome Suites hotel development investments.

In 2026, we expect continued recycling of existing hotel capital, resulting in net hotel development outlays of $20 million to $45 million, 70% lower at the midpoint than 2025 levels. Over the next several years, as hotel transaction activity improves, we expect additional recycling opportunities to emerge.

Before we open it up for questions, I'd like to walk through our expectations for 2026. For full year 2026, we expect adjusted EBITDA in the range of $632 million and $647 million. reflecting organic growth across higher revenue hotels and markets, strong royalty rate growth, sustained international momentum and further contribution from partnership and non-RevPAR revenues. We expect our adjusted diluted earnings per share for full year 2026 to be in the range of $6.92 to $7.14 per share.

Our outlook is based on the following key assumptions: Net global rooms growth of approximately 1% year-over-year, reflecting our expectation for U.S. net rooms growth to return to positive territory alongside continued international expansion. Consistent with the normal timing of same year conversion openings U.S. net rooms growth is expected to be more heavily weighted towards the latter part of the year.

Global RevPAR in the range of negative 2% to positive 1% year-over-year in constant currency, with U.S. RevPAR between negative 2% and positive 1%. average royalty rate growth in the mid-single digits year-over-year and adjusted SG&A increasing in the mid-single digits. Our outlook excludes the impact of any additional M&A, share repurchases completed after December 31, or other capital markets activity. We remain focused on investing in high-return initiatives that enhance our long-term growth trajectory, improve returns for our franchisees and drive meaningful shareholder value.

With that, Pat and I are happy to take your questions. Operator?

[Operator Instructions]. Your first question comes from Michael Bellisario from Baird.

First question just for Scott, just one more on the spending outlook. Maybe could you just walk us through expectations for key money spending, [ CapEx ] and also JV investments in 2026 as well.

Sure, Michael. Thanks for the question. So in terms of key money, as you saw in our release, we did spend less money in 2025 than we did in 2024. We were about net $83 million compared to $112 million in the prior year. So we were pleased to see that our average key money check size for our domestic system was down year-over-year as well as the number of deals that needed key money to be signed.

For 2026, we do think we'll see an acceleration of openings. So we do expect key money to increase off that base at $83 million did include some recovery. So our net -- our gross outlays for key money were about $92 million. We would expect for 2026 for that number to be somewhere between $105 million and $110 million for 2026 in terms of key money.

In the recyclable capital, we had really, really good success of continuing to pull down that use of capital there. capital for 2025 was about $103 million net, 30% lower than it was in the prior year. And as I said in the prepared remarks, we are tapering down the use of that recyclable capital. So we expect that to drop another 70%. So we are guiding to a net use of capital of about $20 million to $45 million next year. So that will be a decline from the $103 million we spent this year.

So as we've been talking to the Street for the last couple of several years been that -- capital is really around launching the growth of Cambria and the Everhome Suites brand. We've been very pleased with how those brands have grown with Cambria now over 75 hotels in Everhome really with a strong start. We feel we're in the place now if we can start tapering that capital. And as we taper the outlays, we also expect to see recycling improve here over the next couple of years as the transaction market improves and the overall U.S. hospitality industry.

Mike, I would just add that the strategy underlying it all is that the value proposition for our franchisees has gotten better, the amount of key money per deal to attract new entrants is declining. And as Scott said, obviously, as more hotels open and that key money actually gets used, that's a positive sign. And then just back on the capital for both Cambria and Everhome, the final chapter in all of this is to recycle it back to either higher investment initiatives, we'll return it to shareholders. So we're really entering that phase with Cambria and we'll be doing that this year with Everhome.

Got it. That's helpful. And then one related question just sort of on the buyback front there. Just where does the balance sheet need to get to in order for you guys to be more aggressive or more programmatic with buybacks going forward? That's all for me.

I think when you look -- yes. When you look at last year, we took kind of a pause after we bought the other half of the Canadian JV. I mean that was basically about $100 million worth of money going out to acquire that business. It's a market we've been in for 70 years, 30 years of that in the joint venture. And we've seen really fantastic early results on that, as Scott mentioned, we got the integration of that done at the end of 2025. So we took a strategic pause during the summer months and then resumed it in Q4. I think when we look at it, we are always doing our normal investment prioritization and looking at ways to invest back in the business, looking at M&A as an opportunity. And then as those things provided additional capital. We look for share returns and dividends. So that's kind of the way we look at it. You've seen our net debt-to-EBITDA ratios, which are in the range where we feel very comfortable. So that's how we will be thinking about it as we move forward in 2026.

Your next question comes from Lizzie Dove from Goldman Sachs.

I wanted to ask about your commentary around U.S. rooms growth returning to positive this year, just given that would be quite an improvement from where it was at least organically in 2025. Any more color on that or specific brands that you think will drive that?

Yes, it's a great question. As we mentioned in the remarks, we saw an increase in our both mid-scale and economy franchises awarded. They were both up 5%. And That, coupled with our conversion pipeline increasing by 12% in the fourth quarter. And then as we mentioned, we're seeing improvement in guest scores as well. So the brand quality is getting better. That gave us the confidence in the fourth quarter to take some very targeted, deliberate and ultimately value-accretive exits, which was really the story towards the end of 2025.

We look at 2026 there's a lot of constructive things that we see, both in our pipeline today with regard to the brands, as you mentioned, the ones that we're really seeing a lot of uptick from a conversion perspective, our Quality, Clarion, Clarion Point, Collage Roadway and Ascend, those brands from a conversion perspective really performed well for us.

We're also seeing, as I mentioned in the remarks, Country Inn & Suites by Radisson, the redesigned prototype there is driving a lot more both new construction and conversion interest for that brand as well. So those are the drivers we expect to be from a brand perspective that will help us get back to that sort of positive territory we mentioned.

Some. That's clear. And then just on the RevPAR side of things in terms of what you're forecasting for domestic RevPAR outlook, you called out a couple of tailwinds or potential tailwinds from World Cup and stimulus, et cetera. Just curious how much of that is kind of baked into what you're expecting for U.S. RevPAR growth this year or whether that's more kind of incremental upside if those come through?

Yes, I would say some of these -- if you look at the impacts that hit us last year, they were all transitory, whether it was the government shutdown the lapping hurricane impact we had in Q4, which is continuing here into of continued into Q1 of 2025. So we have that comp in the first quarter of '26. And then weaker inbound travel from international markets. When I look at the potential for the upside here, it's really some things that are a little bit harder to measure.

If we look at the tax relief, the early returns are looking great. So far, the tax refunds that U.S. citizens are getting are up 11%. And the overall tax relief that's come back so far this year on a year-over-year basis is up 18%. So we do know that the consumer has that stimulative backdrop for the first half of the year here, which we think will be a real positive for us.

When you look at international inbound, the dollar is the weakest it's been in 4 years. So international inbound travel, the U.S. is on sale from that perspective. And that also makes travel outside of the U.S. more expensive. So we would expect U.S. travelers to stay at home. So those things aren't necessarily baked in because they're a little bit harder to put into our guidance.

But when we look at sort of where we are in the midpoint of that range we gave that's sort of the backdrop for how we thought about some of the demand catalysts. But as I said, last year's weakness was primarily transitory. It was not structural, and we're very constructive on what we see from a RevPAR perspective in 2026.

Your next question comes from Dan Politzer from JPMorgan.

I wanted to go back to the RevPAR expectations for 2026. It does sound like there's some hope stimulus in there and certainly it's scaling upper midscale seem to be promising. But I guess kind of as you think about the RevPAR cadence for the year, how should we think about it progressing as it relates to that guidance that you've laid out?

So one thing I think to look at, and we mentioned this on prior calls, and we saw it in 2025 is the fact that our occupancy index for the entire year was positive. So when we've looked at cycles in the past, the first thing to recover is occupancy then followed by rate. So from the standpoint of going into the year, that is a really positive green shoot.

The second thing we mentioned this on the last call, and again, we saw it in Q4 is the performance of the economy segment. Is that segment improves and mid-scale improves and you get sort of an upward trajectory there. Again, we saw that from a RevPAR perspective, and from a RevPAR index perspective, we saw better performance in Q4 for our economy brands.

And then I would just say, as you look at the first 6 weeks of the year here, if we look at the markets outside of the U.S. we're already seeing a 1.7% increase in RevPAR year-to-date. So that's without the hurricane impact in it. And then as we look at what's in that 1.7 million, again, it's driven by a 2.3% occupancy gain. So we are seeing that strength in our hotels able to sort of fill the rooms, and that usually then leads to the impact for the ability for them to begin to move ADR in the right direction.

I think as the year lays out, traditionally, our Q2 and then our Q3, our Q3 is usually our highest demand RevPAR. And as I said in the remarks, that aligns nicely with the tax relief, it aligns nicely with the gas prices for road trippers as well. So we would expect that RevPAR increase to sort of improve as we move into the year in addition to the lapping of the hurricane impact that we're going to see here in Q1.

Dan, just to add a little bit more color. We do expect Q1 RevPAR will still be negative given those hurricane impacts that we had really is about 340 basis points to our results in the first quarter of last year. So we'll be lapping that, but we expect an inflection point in Q2 as we lap those hurricane those comps that Pat mentioned. So you'll see kind of more of a negative RevPAR in Q1 with an improving as the year goes on to reach our overall guidance. But as Pat mentioned, we're very optimistic given what we've seen on the non-hurricane states, given that that's positive RevPAR for those through the first months of the year.

Got it. And then just for my follow-up, I think the footprint, you've talked about in the past, removing some of the lower-performing properties off the platform. Maybe we're not complying with the guidelines or just underperforming in general. Have you basically cycled through that element of our -- of kind of culling the footprint? Or is there more to go there just as we think about that pathway to achieving U.S. domestic rooms growth in 2026?

Yes. It's something we do naturally. So it's always there as potential owners aren't performing or an asset becomes -- the owner wants to move that to a different -- either go independent or make it a different product altogether. So that's a natural, but we did accelerate some of that or I would say, took some targeted ones in the fourth quarter. That was more of a onetime on really looking at where we can clean out markets where we know there's opportunity to backfill that with a higher quality, better performing hotel. That impacts our average royalty rate, it impacts our guest satisfaction scores when we're able to upgrade the portfolio.

And it's something that the company has been doing for years. But in the fourth quarter, we saw some real positive signs from growth perspective on the pipeline and also on new deals, which gave us more confidence in the ability to sort of take out some of the lower performance. So I would say it was more of a an outsized number in the fourth quarter, but our normal sort of 3% to 4% churn rate is kind of where we would likely get back to.

Is there any way to just give the fourth quarter number for that? For the additional?

The overall -- just for the amount that we're kind of taking out as part of this initiative, so we can kind of better get an idea of the organic. It was about 20 hotels. When you look at that, it's about 30 to 40 basis points of net unit growth.

Your next question comes from David Katz from Jefferies.

Good morning, everybody. Thanks for the question. Pat, I think you may have just touched on this a bit, but I wanted to get a sense for often when there is kind of a period of removals it lasts for a period of time. How long do you expect this sort of offsetting removal process to take before we sort of settle into what presumably, NUG would go up, right, once that process is a bit more completed, right?

Yes, well, that's why we feel we're going to get back to a positive note this year in the U.S., we'll be positive overall. But in that U.S. note number, we really are looking at what's in our pipeline today. the franchise agreements we sold last year, which were, as I said, in these primary areas where we're taking these additional exits, they're up 5%.

So we've seen that, and they're in the conversion as part of the pipeline which was up 12% in the quarter. So that gave us the opportunity to say we know we have opportunity and interest for these markets for these brands. And so exiting these underperformers and the ability to backfill them is the strategy. When you look at our conversion hotels, they open anywhere between 3 and 7 months. So again, there's a lot of that will be sold this year that's not yet in the pipeline that will open this year. So that's a historical fact about the type of as I mentioned, the speed of execution within our pipeline. And so that's the way we think about it, David. I would say what we did in Q4 was elevated more so than what we would normally do.

I think, David, take the other thing -- we've been in a few years of no new construction across the U.S. industry. So the normal process as Pat is talking about that we always want to make sure that we're making sure our portfolio is performing well. It's a little bit more enhanced in terms of termination, just because you don't see the new construction coming in. Typically, we have about 1/3 of our openings are from new construction. In the last couple of years, it's been more in the 15% to 20%, just given the tougher U.S. development environment. So the calling of our system or exits here to make sure we keep brand quality up is just a little bit more pronounced. But we expect our termination rates as we go forward in 2026 and 2027 to trend back to historical normals.

Understood. And when we think about a much longer-term view, Pat, how do you see sort of the company getting to a normal NUG. I mean, do you is it reasonable to aspire to where the NUG levels are for some of the top industry companies are? Or is something more moderate like what you think is an appropriate sort of ongoing normalized net level for Choice?

Yes. David, I mean, when I look across the industry, NUG is coming from international. I mean that's look at everybody's NUG, it's international. And if you look at ours as well, 2025 was kind of the next phase of our growth on that in effectively the rest of the world. So we're really excited about that becoming a bigger contributor.

I mean -- and then I think the second piece is the return of new construction. That's the other aspect of this. When I look at our business and I look at the extended stay opportunity that we have here in the U.S., I mean that's continuing to outperform the competition. We added 12% more rooms we outperformed on RevPAR. So it's really a function, when I look across the industry, most of the NUG is coming outside of the U.S., and that's an area that we are growing in as well.\

Your next question comes from Robin Farley from Unit Bank Switzerland.

Great. I'm able to ask about your RevPAR guidance, just that the global is at the same rate as U.S., but your international RevPAR has been growing above the U.S. rate. I think we see that broadly. So just wondering why you're not seeing something at -- or expecting something at a higher rate in your international markets?

Well, I think the first part of it, Robin, is the size of the international market relative to -- so as we saw last year, we had very strong international RevPAR growth. But relative to the U.S., it was offset. So that's one factor in it.

I think the second is -- many of the -- a lot of the growth we had this year are going to be ramping hotels next year. So we are factoring that into our RevPAR thinking in the 47 countries that we're in and outside of the U.S. So it's a bit of a story about -- it's a small contributor today, and there's obviously a lot of variability in the 47 markets that we have hotels in.

Yes. And Robin, as Pat mentioned, it's really when you look at a same-store sales basis, we do see strong growth, particularly in Canada. We think we'll be more about 5.5% growth for the year. Our CALA region should be around 8.5%. But as Pat mentioned, just given we do report on a full system availability with some of the ramping hotels, just brought those numbers down a little bit, but we do think the general economic environment in the international markets will be stronger than the U.S.

Great. And just as a follow-up, still thinking about your international growth. I don't think -- I saw that the U.S. royalty rate you mentioned in the 5% range. I don't know if you gave that specific number for international royalty rate. I know you indicated it was up. But just wanted to get a sense of that, just given how much more direct you're doing versus master franchise, it seems like that would have stepped up a lot. And then I don't know if there's anything about key money with international growth that's different that you would call out than what we typically see from U.S. domestic growth.

I'll answer the key mining question, Robin. So as we have looked at our international business, as you mentioned, it has become more of a direct franchising model than we have been in the past. And what's really exciting is the power of the brands that we have internationally means we don't have to do key money the way we do here in the U.S. from that perspective to get the types of opening. So it's a much lower amount of money that's required to incent new growth. And then I think, Scott, do you want to answer that.

Yes, in terms of the royalty rate, we have -- the contracts we have been doing, we have seen some improvement in the royalty rate. Our royalty rate in our direct markets is about around 2.7% across the international markets. When we do go to market in an MFA agreement, a master franchise agreement, obviously, those are lower royalty rates given that -- our partners are responsible for servicing the brands in the local markets. And those rates are more around 0.5% to 1%. So we're continuing to evolve our disclosures and moving forward, we'll look to give more forward-looking guidance on what that royalty rate looks like going forward, but those are -- if you're looking to model some broad numbers to use.

Your next question comes from Patrick Scholes from Truist Securities.

Sorry if I missed this. Did you give an outline or a guided range for expected return of capital such as combination of share repurchases and dividends? And if not, would you be able to do so? No, Patrick. We did not give any guidance as we typically do not. We think about our capital allocation, obviously, as we've talked many times on the call, we, first and foremost, always look to invest our capital back into the business organically as we think that's the highest return to shareholders. If there is meaningful and accretive M&A, we certainly look at that. And then with our excess cash flows, we do return those to our shareholders through dividends and share repurchases. But we typically do not provide guidance on that. We'll continue to evaluate those opportunities. And as the year goes on, we'll report on how we allocate that capital. But as we typically have not, we did not give guidance.

Okay. I do think it would be helpful from talking with quite a few investors about this. If you did, just a suggestion, certainly, it is well received the way Hilton and Marriott to in their earnings releases.

Your next question comes from Trey Bowers from Wells Fargo.

Just a couple of more financial questions. Working capital and other was a pretty big drag in 2025. As we look to model '26, should we expect a reversal of that $98 million? Or is there anything to call out specifically that's driving that?

Sure. Welcome, Trey. This is your first earnings call with us, so we're glad to have you -- for covering our company. Yes, there are some timing reversal items that are in there are really around just the timing of some tax payments that we have made that will obviously be utilized in 2026 as well as other some other working capital. So I would expect most of that to reverse going forward in 2026.

Great. And then thank you, guys for the clarity on the capital outlay. Just as we look to model that, is that more an increase in the distributions and proceeds coming back to you? Or is it in lockstep with that also lower contributions, a little bit of both? Or just if you could give a little more granular detail around the multiple items that kind of feed into that?

Yes, Trey, welcome. And it's a little bit of both, as we've talked about, lower money per unit and then also the tapering off of Everhome this year and the completion of Cambria last year. as we think about recycling, a lot of that is going to be driven by market conditions around the attractiveness of the buy-sell bid ask that's out in the market to allow us to move some of that those owned hotels back to franchised hotels.

Yes. When you look at the recycle capital, I'd say the step down that I mentioned the 70% reduction. That's primarily on outlays. So as we mentioned, we're tapering these down. So we expect recycling. This year, we did about $32 million, that'd be somewhere in that same range with opportunities to do more of the transaction market rebounds here, but really the step down is really about outlays as we start tapering down those programs.

Thank you. Your next question comes from Meredith Jansen from HSBC.

I was hoping you might speak a little bit more about conversions in terms of how they're breaking down from independents or other branded companies. potentially how you think about inter-branded conversion? I know that separately and maybe a little bit of regional color there.

And a second part of this, and I think I understand Pat from your comments, you may have a different take on it. I was listening to a CEO, interview Allie and Alison he talked about how given lender comfort and more conversion options that conversion levels were going to be structurally higher that there was a change there. And I would love to get your thoughts on that.

Sure. Yes. Definitely, when you see where the marketplace has been kind of a flattish RevPAR for the last couple of years and interest rates being high, that has driven new construction down. So it's become much more of a conversion model. That's an area that hotels has led on for years. And they do pick up in times like the global financial crisis, the pandemic and even in the last couple of years as new construction projects have just been harder to finance. So it's an area where -- up strength for us, where the conversion opportunities come from. For us, I always say when times are a little tough for hotel owners, independent hotels come in out of the rain. They want to come into a brand that has, hey, it's a proven brand.

But b, it's got a loyalty program, revenue management, opportunity to lower their costs through the use of our tools and our procurement programs and the like. So those are the types of hotels we normally see. And that's why brands like Ascend do well in times like this and had a very good year last year. brands like quality and our economy brands kind of picking up with new units. So that's where the growth is coming from into those brands, but it's primarily coming from I would say, independents and then -- there are some other branded conversions. That's the -- usually the second highest contributor to our new conversion or new entrant model that are from the conversion hotels.

There are no further questions at this time. I will now turn the call over to Choice's CEO, Pat Pacious for closing remarks. Please go ahead.

Well, thank you, operator, and thanks, everyone, for joining us this morning. We look forward to hearing you again in to speaking with you again in May when we report our first quarter results. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's Third Quarter 2025 Earnings Call. [Operator Instructions] I will now turn the call over to Allie Summers, Senior Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. Before we begin, please note that today's discussion includes forward-looking statements as defined under U.S. securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied.

For more information, please refer to our filings with the SEC, including our most recent Forms 10-K and 10-Q. These statements speak only as of today, and we undertake no obligation to update them. A reconciliation of any non-GAAP financial measures referenced in today's remarks is included in our earnings press release available on the Investor Relations section of choicehotels.com.

Today's remarks also include projected non-GAAP adjusted EBITDA contributions from our international operations. We are unable to provide a reconciliation to comparable net income projections without unreasonable effort as the necessary adjustments cannot be reasonably estimated for the period. The impact of this unavailable information could be significant relative to our expectations due to the inherent difficulty in forecasting certain items.

Joining me this morning are Pat Pacious, our President and Chief Executive Officer; and Scott Oaksmith, our Chief Financial Officer. Pat will discuss our business performance and strategic progress and Scott will review our financial results and outlook.

And with that, I will turn the call over to Pat.

Thank you, Allie, and good morning, everyone. We appreciate you joining us today. In the third quarter, we drove adjusted EBITDA 7% higher to $190 million, reflecting the strength of our higher revenue brand mix, a surge in our small and medium business traveler and group's business revenue, continued momentum across our partnership revenue streams and the accelerating earnings contribution now coming from our expanding international business.

The strength of these earnings drivers allows us to raise the midpoint of our full year earnings outlook and tighten the range reinforcing our confidence in the growth of our global business going forward. During the quarter, we increased our net global rooms by nearly 2.5% year-over-year and growth was led by continued expansion in higher revenue segments, where we grew by nearly 3.5%, along with higher revenues per hotel across all segments.

Today, 90% of our global portfolio consists of those higher revenue-generating rooms, further strengthening the value we deliver to guests, franchisees and shareholders. The future growth of our portfolio is compelling, fueled by robust developer interest with global franchise agreements awarded up 54% year-over-year. And today, of rooms in our global pipeline are in higher revenue brands. As shown in our investor supplementary materials, these hotels are expected to be 1.7x more accretive than our current portfolio, driven by their RevPAR premium higher effective royalty rates and larger average room counts. This pipeline strength underscores our ability to continue to elevate our earnings per unit by adding accretive hotels to our platform.

Our pipeline is important not only for its size but also for the quality of the hotels within it and the velocity at which we are able to convert signings into openings. In fact, the number of hotels that opened over the past year without ever appearing in our global pipeline, accounted for approximately 1% of the system-wide unit growth. As we look ahead, we're optimistic about the next phase of the U.S. lodging cycle and its impact on new construction openings.

In the U.S., we expect last week's lowering of interest rates, continued investments in the build-out of AI infrastructure and a constructive regulatory environment will drive stronger demand especially for our travelers. Combined with low industry supply growth, continued favorable demographic trends and significant demand catalysts such as the 2026 World Cup, the U.S. 250th anniversary and the Route 66 Centennial, these tailwinds are expected to generate incremental travel across our markets, and set the stage for stronger RevPAR growth in the years ahead. Backed by the strength of our core travel base, retirees, road trippers and America's blue and gray collar workforce.

Our purpose-built hotel portfolio is well positioned for sustained growth. As we look for signs as to when the cycle in the U.S. may turn positive for our business, 2 indicators are moving in the right direction. First, our Economy transient segment occupancy performance has begun to improve year-to-date and has shown year-over-year growth in each of the last 2 quarters excluding the impact of the third quarter 2024 hurricane. This segment was also the first to recover after the last period of demand softening, followed by the midscale segment.

Second, occupancy index across our entire U.S. portfolio is up slightly year-to-date, a constructive early indicator that in prior cycles, has preceded broader U.S. RevPAR growth. Turning to our business outside the U.S. 2025 has been the year that we put the final pieces of our growth foundation in place, and we're very excited about the future.

Our international business which represents $3 billion in gross rooms revenue is now our highest growth opportunity. As highlighted in our supplemental investor materials, our teams have made incredible progress in improving the value proposition of our brands. They've delivered higher earnings per hotel, higher royalties and higher operating margins for our business internationally. We've built a scalable global platform and successfully repositioned the business towards a higher-value direct franchising business model, which has grown by 22 percentage points over the past 3 years, and now represents 40% of our international rooms portfolio.

Over that same period, our international EBITDA margins have expanded to 70% and per unit EBITDA has tripled. The foundation we've built gives us high confidence in our ability to capture rising demand across markets where our brands have a meaningful runway for growth and a significant opportunity for continued royalty rate expansion.

With this momentum, we expect to generate more than $50 million in international adjusted EBITDA by 2027, doubling from our 2024 baseline. In the third quarter alone, we achieved 35% growth in adjusted international EBITDA, and we expanded our international portfolio by over 8% year-over-year surpassing 150,000 rooms outside the U.S. That growth was fueled by a 66% year-over-year increase in hotel openings.

In EMEA, our portfolio grew to nearly 64,000 rooms, up 7% year-over-year. We're especially encouraged by the progress in France, where we expect to onboard over 4,800 mid-scale rooms under direct franchise agreements by year-end, nearly doubling our presence. This milestone highlights our ability to continue to scale our direct franchising markets. We also recently entered Africa with our first development agreement, including a flagship property in Kenya's Masai Mara, Game Reserve, marking the start of broader expansion across Central and Southern Africa.

In the Caribbean and Latin America, we expanded our footprint by nearly 50% over the past 3 years to more than 25,000 rooms across more than 20 countries. Just 2 weeks ago, we hosted our first Choice Hotels CALA convention in Mexico, where we saw tremendous enthusiasm for our upscale and mid-scale brands. Our targeted business travel strategy is reshaping the guest mix.

With about 60% of stays in the region, now business related, driving weekday demand, higher spend and long-term loyalty. We also entered a new direct market, Argentina, with the opening of the Radisson Blue in Patagonia and recently signed an agreement for a new upscale Radisson Red. This follows the successful opening of the Radisson Red Sao Paulo a couple of months ago, further strengthening our upscale and upper upscale presence in the region. Elsewhere in the Americas, following the full consolidation of Choice Hotels Canada, we've transitioned to a direct franchising model and are already seeing impressive results from the 355 Canadian hotels with third quarter Canadian RevPAR up 7% year-over-year and growing franchisee interest across our brands.

In Asia Pacific, since launching our Ascend collection in China, just 5 months ago, we've already onboarded nearly 80% of the more than 9,500 anticipated upscale rooms with the remainder expected by year-end. We are on track to add roughly 10,000 mid-scale rooms over the next 5 years, significantly expanding our reach among Chinese travelers and driving valuable outbound traffic to our hotels in the rest of Asia and beyond. We also successfully launched our mid-scale extended stay brand, MainStay Suites in Australia, marking the first expansion outside North America. This direct franchise agreement adds nearly 600 rooms and marks the first step in extended stay growth across the region. All of this exciting progress around the world has positioned our international business as our fastest-growing segment.

Our second fastest earnings growth segment is extended stay in the U.S. Over the past 5 years, we've expanded our U.S. extended stay portfolio by more than 20%, now exceeding 55,000 rooms. We've delivered 9 consecutive quarters of double-digit system size growth outpacing the industry.

Today, this cycle-resilient segment represents nearly half of our U.S. pipeline offering longer average days, higher margin and stable revenue streams. Despite a challenging new construction environment for the industry, our Everhome Suites brand continues to gain traction.

We now have 23 hotels open, 16 of which opened this year and 40 more U.S. projects in the pipeline, including 12 under construction. In the third quarter, we more than doubled Everhome openings year-over-year, expanding into fast-growing markets like San Antonio, Texas, a key emerging data center hub. Nationwide, the manufacturing and data center build-out is fueling strong long-term demand for extended stay. And with 40% of all economy and mid-scale extended stay rooms under construction, belonging to Choice brands, we're exceptionally well positioned to maintain segment leadership.

Our strategic expansion into higher revenue-generating segment is also strengthening our economy transient brands. Through deliberate portfolio optimization, we've been replacing lower-performing assets with higher quality, more profitable hotels, lifting guest satisfaction and brand equity. As a result, our economy transient hotels are outperforming comparable hotels within their chain scale in RevPAR growth and gaining RevPAR index share. This strong performance is attracting developer interest, driving a 35% year-over-year increase in our U.S. economy transient rooms pipeline and a 27% year-over-year rise in U.S. franchise agreements awarded in the third quarter.

Importantly, the new hotels entering our system are expected to generate, on average, higher royalty revenue than those we strategically exited. In our mid-scale segment, developer interest remained strong with our global pipeline up 5% year-over-year. The redesigned country and in suites by Radisson prototype engineered for cost efficiency and ease of conversion has reinvigorated the brand.

In the third quarter, we doubled the U.S. franchise agreements awarded and grew the U.S. pipeline by 15% year-over-year, reflecting renewed developer confidence and we remain on track to deliver year-over-year growth in brand openings in 2026. In our upscale category, we continue to expand rapidly increasing our global system size by 21% year-over-year to 118,000 rooms and driving a 33% increase in U.S. franchise agreements executed during the quarter. As I mentioned earlier, the velocity with which we move hotels through our pipeline remains a key differentiator.

On average, our conversion hotels open within 3 to 6 months about 80% faster than new construction, allowing both Choice and our franchisees to capture revenue earlier. Choice remains the leader in the share of conversion hotels in its segments. In the third quarter, our U.S. conversion franchise agreements increased 7% year-over-year, and we expect conversions to remain a core growth driver through year-end and to account for approximately 80% of total U.S. openings in 2025.

Now let's turn to the exciting investments we are making in our franchisee success system. Choice continues to have the best technology team in the business. We're especially proud that Forbes recently recognized Choice as one of America's best employers for tech workers, a testament to our culture of innovation and talented teams shaping the future of travel through technology.

Today, we're building on our leadership in cloud computing and data to evolve Choice's technology stack into an intelligent, always-on ecosystem one where autonomous agents continuously help franchisees optimize rate and revenue management, streamline operations and free franchisees to focus on delivering exceptional guest experiences. Our systems are advancing from a tool to a true teammate, reflecting Choice's long-standing commitment to helping owners succeed from day one. Backed by our $60 million technology investment program now nearing completion and on track to conclude next year, this transformation will mark a pivotal step forward in how our platforms empower franchisees to achieve more.

These next-generation systems will understand intent, reason across data sources and take action autonomously, equipping our owners with predictive insights, automated workflows and real-time decision support to unlock new levels of efficiency, profitability and growth. As part of our technology investment program, we're also expanding our reach in business travel and deepening guest loyalty, driving higher customer lifetime value and further strengthening our competitive edge.

The transformation is designed to deliver durable RevPAR growth, expand RevPAR index share and support long-term rooms expansion. We're already seeing measurable impact with year-to-date occupancy share gains versus competitors through September. In business travel, we strengthened our position by expanding and elevating our global sales capabilities. Business travelers now represent roughly 40% of stays, creating a balanced mix that supports rate stability across economic cycles.

In the third quarter, group revenue rose 35% year-over-year while small and medium business revenue grew 18%. Importantly, Choice's U.S. business traveler base continues to provide steady demand made up of guests whose jobs require travel, representing industries such as construction, utilities, health care staffing, logistics and manufacturing.

Today, we manage more than 1,600 global business accounts and serve a strong SMB and Smart base, underscoring our role as a trusted partner for business, group and event travel. Next year, we'll launch a dedicated digital platform for small and medium businesses tapping into a $13 billion opportunity to grow midweek occupancy and extend our corporate reach.

In addition, we're developing new AI-enabled RFP management and sales tools designed to streamline group sales, accelerate responsiveness and drive more high-value bookings. Let me now turn to the exciting progress we're making in the types of guests we serve. Across our portfolio, the quality of our guests continues to rise. Half of our U.S. guests now have household incomes above $100,000 and 1 in 5 exceed $200,000, representing an increasingly attractive customer base for both our franchisees and partners.

Recent enhancements in 2025 are delivering results. loyal members stay nearly twice as many nights, spend more per se than nonmembers, and are 7x more likely to book direct, driving greater customer lifetime value for choice and our franchisees. Just yesterday, we announced new benefits launching in January. This meaningful transformation of our program is designed to accelerate member growth, increase co-brand card revenue and strengthen direct bookings, further deepening engagement and fueling demand. The last time we revamped the program, we achieved a 700 basis point increase in loyalty contribution, giving us strong confidence in this next evolution. The enhancements in our rewards program are designed to further activate the expanding core demographic that we expect will drive demand well into the future, retirees and near retirees. This growing demographic now represents nearly 30% of our revenue and continues to be among the most valuable and active travelers on the road. They spend more at our hotels and are twice as likely to be members of our rewards program. This year alone, more than 4 million Americans are reaching retirement age, the largest cohort in U.S. history, entering their peak leisure travel years with record levels of disposable income.

By 2030, 1 in 5 Americans will be 65 or older, representing an expanding base of affluent travel-ready consumers who spend more on travel than younger generations. Studies show that spending by this golden generation is expected to increase by 70%, reaching nearly $15 billion over this time period. With gas prices at multiyear lows and expected to go lower next year, Choice is uniquely positioned to serve these travelers, supported by our extensive portfolio of convenience dry 2 locations that appeal to the millions of road trippers hitting the open road for new experiences.

Our next-generation loyalty program is built to capture this growing demand. giving these high-value guests even more reasons to stay with choice. And in an AI-driven world, travelers will gravitate towards brands they know and trust and those they have real relationships with. That's why our loyalty evolution is focused on deepening those connections, positioning choice to capture this next wave of demand.

Together, these initiatives are driving greater demand and creating higher customer lifetime value for our franchisees. We're confident these investments and those still to come will expand our growth opportunities and create meaningful long-term shareholder value. Importantly, we're positioning choice for enhanced performance and sustained growth. our technology forward strategy and disciplined execution, combined with an asset-light fee-based model, have meaningfully strengthened our growth trajectory even in the dynamic macroeconomic environment. We continue to generate substantial free cash flow, enabling us to reinvest in high-return initiatives that fuel growth while delivering sustainable value to our shareholders. We are confident that our strategy will continue to unlock scalable growth opportunities, expand market share and drive long-term returns.

With that, I will now turn the call over to our CFO. Scott?

Thanks, Pat, and good morning, everyone. Today, I will cover 3 key areas: our third quarter financial results, our balance sheet and capital allocation and our outlook for the remainder of 2025. We delivered record third quarter adjusted EBITDA of $190 million, up 7% year-over-year despite a softer U.S. RevPAR environment. This performance underscores the strength of our diversified revenue streams and the early returns from our strategic investments.

Our record quarterly performance was driven by system-wide rooms growth and our higher revenue extended-stay and upscale segments, a higher average royalty rate the continued expansion of our international business, including the introduction of our brands in new markets and strong partnership revenue.

Let's turn to the 3 drivers of royalty fee growth, unit growth, RevPAR performance and royalty rate. In the third quarter, we grew our global rooms 2.3% year-over-year, led by a 3.3% growth across our higher revenue segments, upscale, extended-stay and mid-scale. Each segment delivered strong results in the third quarter, reflecting the benefits of our deliberate investments and disciplined portfolio focus. Our U.S. extended stay room system size grew 12% year-over-year. highlighted by a 14% increase in openings. At the same time, we awarded 30% more franchise agreements in the U.S. year-over-year.

We strengthened our position in the mid-scale segment, our global pipeline increasing 5% year-over-year. Specifically, our flagship Comfort brand saw U.S. new construction franchise agreements doubled year-over-year with the new construction U.S. pipeline accelerating quarter-over-quarter. In the upscale segment, we expanded our global rooms portfolio by 7% quarter-over-quarter and attracted strong developer demand.

Our SEM collection now exceeding 72,000 rooms worldwide saw a sixfold increase in global openings and twice as many franchise agreements awarded in the U.S. versus last year. Even in a challenging construction environment, we awarded more U.S. new construction franchise agreements than last year and opened 15% more U.S. new construction hotels in the third quarter year-over-year.

Our focus remains on elevating the quality of our portfolio. We continue to strategically exit select assets that under-index our portfolio and fail to meet our requirements while maintaining system-wide growth, clear evidence that our portfolio optimization strategy is working.

Turning to our RevPAR performance. Our global RevPAR for the third quarter was flat compared to the prior year, led by strong performance from our international markets. We achieved third quarter RevPAR growth across every region outside the U.S. with overall international RevPAR up 9.5% year-over-year. On a constant currency basis, international RevPAR growth was led by the EMEA region, which delivered 11% year-over-year increase. The Americas and Asia Pacific regions each posted 5% year-over-year RevPAR growth. We were particularly pleased with the performance of our Canadian operations, where RevPAR increased 7% in the third quarter.

Our U.S. third quarter RevPAR declined 3.2% year-over-year, primarily reflecting softer government and international inbound demand. Even so, we achieved year-to-date occupancy share index gains versus our competitors, driven by strategic investments that enhance customer lifetime value for our franchisees. Our extended stay segment of the United States outperformed the industry RevPAR by 20 basis points in the quarter and delivered a 1.4% year-to-date growth through September. At the same time, our U.S. transient economy segment outperformed its change-scale RevPAR by 310 basis points and gained RevPAR index share versus competitors year-to-date through September.

Looking ahead, we remain confident in our ability to deliver sustained RevPAR growth and expand our RevPAR index share. This confidence is grounded in our disciplined high-return investments that broaden our business travel base, deepen loyalty engagement and position us to capture long-term demand supported by favorable demographic trends. particularly the expanding retiree leisure segment and America's blue and gray collar workforce.

Moving to royalty rate. Our third lever of royalty fee growth. In the third quarter, the average U.S. royalty rate increased by 10 basis points year-over-year, reflecting our continued strategic focus towards higher revenue brands and a stronger franchisee value proposition. We remain confident in the future growth trajectory of our system-wide royalty rates, supported by ongoing investments that improve reservation delivery to our franchisees and a robust development pipeline. This pipeline reflects contracts with higher royalty rates, larger average room counts and a RevPAR premium, all of which provide a clear path for long-term revenue growth.

Turning to our partnership business. Our focus remains on strengthening relationships with our strategic partners and suppliers, which was evidenced in a 19% year-over-year increase in revenues this quarter. Growth was driven by strong co-brand credit card fees as well as increased suppliers and strategic partnership fees. As we've enhanced our franchisees facing service offerings, adoption has continued to rise, driving steady growth in our non-RevPAR-related franchise fees across the broad range of services we provide. Expanding our partnership revenue streams and non-RevPAR franchise fees remains 1 of our key priorities and represents a meaningful opportunity for continued earnings diversification and growth. We continue to focus on driving our top line growth while enhancing associate productivity and operational efficiency. We see meaningful opportunities to deploy labor-saving technologies that will deliver significant productivity gains across the enterprise and help mitigate SG&A growth. As a result, we continue to expect adjusted SG&A to increase at a low single-digit rate from our 2024 base of $276 million.

Finally, our adjusted earnings per share were $2.10 for third quarter 2025 compared to $2.23 in the prior year quarter. The year-over-year comparison reflects the impact of our acquisition of the remaining 50% interest in the Choice Hotels Canada joint venture, which resulted in higher amortization expense related to the acquired intangible assets, a temporary increase in income tax expense expected to reverse in the fourth quarter, the reevaluation of our previously held ownership interest in the joint venture and unrealized foreign currency adjustments across our broader operations. Excluding these items, third quarter adjusted EPS would have been $2.27 representing a 2% year-over-year increase. Now let's move to the balance sheet and capital allocation.

As of September 30, we generated $185 million in operating cash flow through September including $69 million in the third quarter. This strong cash generation and the healthy balance sheet underpin our capital allocation priorities, investing in growth initiatives and accretive acquisitions while returning capital to shareholders. Year-to-date through September, we returned $150 million to shareholders in dividends and share repurchases. We continue to deploy capital selectively to scale Cambria Hotels and Everhome Suites, while maintaining a disciplined approach to recycling that capital at the right time. In the third quarter, we generated $25 million in net proceeds from recycling activities and year-to-date, our hotel development related net outlays and lending declined by $53 million. We expect 2025 to be the final year of developing new company-owned Cambria hotels, followed by Everhome Suites in 2026. We with investments expected to be completed in 2027. As the interest rate environment continues to improve and the hotel transaction market recovers, we also expect our capital recycling activity to accelerate. We ended the quarter with a net debt to trailing 12-month EBITDA of 3x and a liquidity of $564 million.

Finally, I'd like to discuss our outlook for the remainder of the year. For the full year, we now expect U.S. RevPAR to range between minus 3% and minus 2%. As a reminder, fourth quarter comparisons will be impacted by elevated hurricane-related demand in the prior year. and we continue to monitor potential impacts related to the government shutdown. We are tightening our full year adjusted EBITDA with the midpoint up by $1 million. We now expect adjusted EBITDA to range between $620 million and $632 million. We are adjusting our full year adjusted EPS guidance to range from $6.82 to $7.05. And primarily reflecting additional amortization expense related to the intangible assets from the Choice Hotels Canada acquisition, which was not included in prior guidance as well as lower equity earnings from joint ventures due to the timing of hotel openings.

Our fourth quarter recurring effective income tax rate is expected to be approximately 21%, reflecting the timing of tax recognition between the third and fourth quarters, as previously discussed. Our full year effective recurring rate guidance remains at approximately 25%. We now expect full year 2025 franchise agreement acquisition costs to be lower than in 2024. Our outlook excludes any additional M&A, share repurchases after September 30 or other capital markets activity.

Our third quarter results demonstrate the success of our strategy and highlight the benefits of our expanded scale and diversified business model, even in a softer U.S. RevPAR environment. We'll continue to invest in high-return areas that enhance our long-term trajectory and drive meaningful shareholder value. Looking ahead, we remain confident in the durability and strength of our fee-based business model. We expect growth to be driven by higher revenue hotels, average royalty rate growth expanding partnership revenues, sustained international momentum and strategic initiatives designed to enhance customer lifetime value for our franchisees.

Pat and I are now happy to take your questions. Operator?

[Operator Instructions] Your first question comes from Michael Bellisario with Baird.

First on this Everhome joint venture that you guys announced in July, I think just in the past, you had mentioned that you were going to recycle owned assets. I know, Scott, you provided some comments there, too. I think we all assume that means those assets get sold to a third party and you did cash. But in this joint venture deal, you still own 80% and you're sort of committing to owning and developing hotels for longer or at least more of a medium-term holding period? I guess, help us understand the motivation, thought process here and how the economics of this deal are maybe better or different than previously owning and developing assets on your own balance sheet?

Yes. Our preferred vehicle has been to develop hotels through the joint ventures that we have. So what you saw in this transaction was really more of a timing of the transaction. So we had started a few hotels on our own balance sheet, owning them, that we're always intended to go into the joint venture, just it had not been fully set up at the time.

So when you take a look at the overall transaction, there were some sales from an accounting perspective that were treated as proceeds from sales. But ultimately, the way that transaction worked it netted us about a $25 million recycling. This doesn't change in terms of our long-term viewpoint on holding assets. As I've always said, we're in the moving business, not the storage business. And we have developed ever homes really to to launch that brand to get it to scale so that it's 100% franchised brand.

So even in this joint venture we either expect our JV partner to buy out our interest at some point in time or to go to market and sell those to additional third parties encumbered with long-term franchise agreements. As we talked about in the remarks, we're towards the tail end of our capital investment in both Cambria and Never home. We expect to wrap up with no new development in Cambria after this year. and then finishing the Everhome development in 2026, where our net capital outlays will be significantly lower. In fact, if you look at our Q3 results this year, we're actually about $50 million less in capital being used on our development of hotels.

So we're at the tail end of that. And as the transaction environment and interest rate environment improves, we do expect to be sellers of those hotels, whether they're on our owned assets or in these JVs.

Okay. That's helpful. And then just similarly, on capital allocation, what was the rationale for not buying back stock during the quarter, especially when it was down so much versus levels where you had previously been repurchasing stock?

Yes, Michael, I mean then we look at our capital allocation hierarchy to invest in the business to do accretive M&A and then return to capital to shareholders through dividends and share repurchases. We bought the other half of Canada we did not own in the third quarter.

So that capital outlay was sort of the kind of -- it rises higher from that standpoint as to what creates more long-term value for shareholders. I would say if you look at our pace of sort of how we've been deploying capital we're effectively on pace through the third quarter with the acquisition and the share repurchases we did in the prior part of the year. But yes, absolutely, it's a very attractive price at this point, but that was the way we deployed our capital in the third quarter.

The next question comes from Lizzie Dove with Goldman Sachs.

I just wanted to ask about the longer-term outlook for rooms growth, particularly in the U.S. It's been tracking down every year, at least when you kind of strip out waste from there. And so as we move forward over the next or 2, what's the kind of base case expectation? And what are you kind of seeing in the development environment or the conversion environment really in the U.S. to drive that?

Sure. So if you look at our pipeline and where we've been focused really for the last 5 years is on bringing higher-quality product into the pipeline and therefore, moving that into the system. And that is going to continue. If you look at the makeup that we talked about in our remarks about 98% of what's in the pipeline today is in those higher-value segments. What we've been opening, and as we've mentioned in the remarks, there's actually because we're doing a lot more conversions they open anywhere between 3 and 6 months on average.

But that also means we're opening hotels in less than 3 months. And so many of those show up as openings, but never even show up in the pipeline. And that's really, as we mentioned in the remarks, about 1% of our unit growth came from the hotels that opened that quickly. So when you look at the pipeline, it's not only the size of it, but it's also the quality of the hotels that are in there. But as importantly as the velocity with which because we've been doing conversions as a company for so many years, we're able to get these hotels open quickly for owners, and that allows them to capture revenue early and us as well. And so as I think as we look into next year, just given the limited supply growth that's been going on in the U.S. from a new construction perspective.

I would expect that trend to continue well into 2026. So that's sort of probably how we would think about the setup for the conversions coming out of the pipeline and the net rooms growth in the U.S.

Got it. That's helpful. And then on to the RevPAR environment, I appreciate the comments you made with some of the green shoots and also World Cup and whatnot next year. I'm curious how you would think about just how much of what's going on at the lower end is structural or cyclical, especially in terms of competition from conversion brands like Spark, premium economy, things like that, the K-shaped recovery. Anything you can share there or then how you think about the long-term trajectory to be able to potentially grow domestic RevPAR again longer term.

Yes. Sure, Lizzie, from our perspective, this is a cyclical business. I mean when I've been at choice for 20 years, and I was probably the third one of these we've been through. The green shoots you do look for is when does occupancy stop dropping. That then gives owners confidence when they set price. And so that's the kind of early indicators that we've seen where the cycle starts to turn, and that's -- in fact, what we're starting to see in our chain scales in our segments and our brands. And we're pretty excited with what we're actually seeing in the economy segment, which, again, is the segment that usually leads you out of one of these cyclical downturns.

So I feel pretty good about sort of what we're seeing on that front. I'd say on the consumer front, this is -- that sort of question around this K-shaped recovery. I think it's missing the fact that you've got a ton of -- I mean, 75% of the people who work in this country work for a small and medium-sized business. And when we're seeing that surge in the SMB business in our hotels, it's because of the types of travelers that are -- the labor force is effectively shifting towards the types of travels that stay in our hotels, construction, utilities, medical staffing, which is traveling nurses and the like, there's a pretty significant tailwind that we see from a business travelers perspective.

The other is what we talked about, which is our retirees and road trippers. And about 30% of our business today are those folks who are 60 years old and older. They're sitting on tremendous wealth in their homes. They're sitting on very attractive stock portfolios, and they've got discretionary income and the time to travel. So we are seeing that traveler on the road, and we expect to see more of them the investments we're making in our loyalty programs that are going to kick off here on the first of January, we're really designed to drive more of that business. And we know that those are the folks who spend more in our hotels, they stay more often and they book direct, which is all a real positive from a unit economics within the hotels themselves.

So we feel pretty good about how the setup is coming for 2026 and those core demographics, the road trippers and retirees and then those blue and gray collar workers, those are expected to be demand drivers, and those are the folks who are in our hotels today, and we would expect we'll get more of that share as we move forward.

The next question comes from David Katz with Jefferies.

Yes. Two things, if I may. I just wanted to get whatever early perspectives you can share with us regarding 2026. I know I understand your business, obviously, and the booking window is short. But any thoughts on how we might use 2025 as a platform off of which to measure 2026? And then I have one quick follow-up, please.

Yes, David, I would look at the 2 things I just spoke about. I mean, I think when you look at our share, and we talked about that in the remarks, of those 60-year-old travelers and above. The research shows they call them the golden travelers because they've got all this time and they've got all this wealth and they are traveling more this year. And that number that cohort is going to grow. We've talked about by 2030, 1 in 5 Americans is going to be at retirement age.

And so over the next 5 years, that cohort only continues to grow. And we overindex for that type of traveler in our portfolio today, and we intend to bring in on that. And then I think on the business travel side, when you look at our business traveler mix, I know you've been around the stock a long time, we used to be 70-30 leisure business. We're now 60-40, and that small business traveler is a much more resilient traveler because they have to travel for their jobs. And what we're seeing, particularly with what AI is doing to the workforce, we're going to see more people who are in that sort of blue and great travel segment. When you look at the job gains and you look at the small business formation that's occurring, they're in the segments that travel in our hotels. And so when we look at that overall total available market for small and medium business, it's about $13 billion of travel on an annual basis. And I think our ability to capture more and more of that share is another positive that we're looking forward to.

So on top of that, I would just add our group's business revenue, which again is up 35% this year. That's a function of the fact that we have put more sellers out there. We have about 20% more sellers who are selling into our business category and our group's business. And so those are the things that I would point to as opportunities that choice is leaning into where the TAM is getting larger.

And David, what I'd add to that is when you step back and look at the broader business for 2026, obviously, we're still working through our planning process. But as we talked about in our remarks, our international business, we feel really strong about continued growth there and believe we're on pace to double that EBITDA contribution on the base year of 2024.

So we do expect strong growth from international next year. in addition from both our partnerships and services business and our platform and ancillary revenues -- as we've talked in the past, we do think we have a very good base to grow off in that mid- to high single-digit growth on those. And we also believe that we can continue to keep our cost relatively contained, especially with all the new tools and AI tools that are really driving cost efficiency throughout the business. So we're very optimistic on 2026.

Understood. And if I can just ask 1 follow-up. So much of the industry has evolved in terms of growth on ancillary fees, non-RevPAR fees, particularly around cards. And I know that you have some -- can you just elaborate on what the strategy or the vision for that is over time?

Yes. I mean when you look at the scale of our business, David, so you look at 7,500 hotels. We probably have somewhere 36 million room nights every year, and you've got multiple people staying in those rooms. So we have a significant opportunity to provide more services to our customers, to our guests in our hotels. And that is everything from co-brand to what we do on the timeshare side and the gaming side as well. And so that's a real opportunity for us. We do see those trends growing and that's reflected in our numbers. I would say on the franchisee side of the house, we are offering more services to our franchisees and the adoption rate of those services is increasing.

So those are the drivers that are impacting the the owner side of the house, the franchisee side of the house. So both of those trends, the consumer growth and the franchisee growth and our ability to sell more services into both of those customer bases or what we -- from a strategy perspective, those are things that we're leaning into and have been pretty earnings accretive over the last several years, and we would expect them to be so in the future.

The next question comes from Stephen Grambling with Morgan Stanley.

I know it's early to be putting 10 to paper for 2026 expectations. But with all the moving parts on expenses, and I know you talked about AI opportunities. How should we be thinking about the run rate or baseline for SG&A this year and then what the growth rate might look like next year, particularly if RevPAR does start recovering?

Yes. We -- as I mentioned, we continue to believe we can maintain SG&A at a low single-digit growth rate. If you look at our results so far through this year, year-to-date, SG&A is up about 3%. And when you take out the acquisition of our Canadian joint venture, it's about 2.5%. As we mentioned, we're finding a lot of labor saving tools and efficiencies with the AI tools that we've already brought into the system. And so I would say going forward, we would be able to model something around that low to mid-single-digit SG&A going forward.

Yes, Stephen, it's pretty exciting that the tools we've already deployed across our workforce and the things that we are working on today, we implemented a new ERP system that went live a couple of months ago. But the intelligence in that system is reducing a huge amount of manual processes and helping our folks in the finance group, for instance, they don't have to do as much exception reporting that type of stuff because the system is providing that information to them. We're seeing it in our software development group. We're seeing significant productivity gains for our folks who build these tools that we deploy to our franchisees. And so it's a pretty exciting time for workforce productivity.

And you're going to see that number reflected in lower SG&A growth, I would expect as we move forward in the coming years.

That's helpful. And maybe 1 follow-up on AI. Are you currently providing any inventory to AI partners or large language models such as Gemini, ChatGPT or others. And maybe how do you think about the opportunity to partner from some of these channels and what maybe the cost of that channel looks like versus things like Google Ads or OTAs or other?

Yes, Steve, it's a great question. And I think at this point, when we look at the distribution landscape and AI's impact on it, the players are still taking the field right now. And so there's a lot of testing and learning, and we are doing some of that with some of these partners behind the scenes really to kind of say, is this going to work for us -- to be successful in this new world, you've got to have 2 things, and we have both of them. The first is all your systems need to be in the cloud.

And the second is you need to have control of and a high-quality level of your data. And most companies don't have that. Choice Hotels does. It's an area that we've invested in significantly -- all of our systems are in the cloud now we don't have any data centers anymore that are company-owned. And all of our data is accessible through the cloud as well. And so those are the 2 things that these LLM are looking for. If you build the right scaffolding around your data, which we have done, you then have the ability to communicate with these LLM and work through the ways that consumers who are starting their search for hotels if that's where they're going to start, we want to be able to be able to provide our inventory rates and availability through those models as well.

And so I would say at this point, the answer is we are exploring, as I'm sure many others are. But I feel like it's a pretty exciting opportunity for us because of the investments we've made over the last 3 or 4 years, in particular, to make ourselves AI ready. And we've actually been using AI in our tools for our franchisees for about 10 years. It used to be called robotic process automation and that was called machine learning. We're using it in a number of our franchisee-facing tools already. But this next step function change that we're working on, I think, is going to be really exciting because the tools that they have today effectively help them record what they're doing. Where we're moving to is a world where the tools that they will be using are going to help them understand what's the recommended next best action I should take with regard to my rate with regard to my channel management, whatever it might be, and we're really excited about the future for that because that choice, we've always kept the sort of franchisee-facing systems in-house.

So we're able to sort of take the benefits of AI, the productivity gains and the tools that are available and really bring them to our owners in a meaningful way. And so we've got some interesting things we're going to be launching with them in the coming months. And so from an excitement perspective, we really feel like the AI boom is going to help our owners make more money, and it's going to help our shareholders do so as well.

The next question comes from Dan Politzer with JPMorgan.

Pat, Scott, I was wondering if you could talk about the key money environment. It sounds like you're taking the expectations there for 2025 to be a little bit lower year-over-year. But maybe puts and takes into 2026, as it seems like other competitors are still looking to increasingly grow their presence in that mid-scale segment in particular?

Yes. As we mentioned on the call, we do expect our key money to be lower than where we were in 2024. Really, I think that's a reflection of just the quality of our brands in terms of the competition. So we believe that we're driving top line revenue to our franchisees and our brands are very valuable. So when people are looking to convert, we're seeing that we don't need to use as much key money as some of our competitors to win those contracts. In fact, average key money per deal was down about 11% for the first 9 months of the year.

So yes, it is a competitive environment, but we do believe that our brands, especially in that mid-scale and upper mid-scale space where really choice has been a leader for many years. We do understand what our franchisees need, what it takes to run a very successful business and capture those customers that Pat talked about a little bit earlier. So -- we're optimistic that the Key MONI environment should be kind of hitting a peak here as interest rates come down, and hopefully, we'll see a turnaround on the RevPAR front where that will be needed less to win deals.

Yes. I would just add, since Labor Day, I've been out at 5 franchisee events that's collectively probably about represent about 1,500 hotels. So these are all owner meetings that we do for a couple of days. And without fail, our owners are telling us that they value our brands and some of them who moved to try these other brands have come back and said. We made a mistake, our performance is down. When you look at the value of a brand that has the awareness of a quality in or comfort in, those things are driving guests and we own those guests. We own those mid-scale travelers. So the need for key money in the ability to win these contracts is not as necessary when you have strong, powerful brands, particularly in the mid-scale segment.

Got it. And then in terms of the free cash flow conversion, was there anything kind of nuanced in the quarter as it relates to that? And then can we think about -- what's the best way to think about full year '25 at that level that you might be able to convert.

Yes, there was some temporary timing differences in the quarter that drove the free cash flow a little bit lower, particularly as you'll see in our 10-Q, we did purchase some investment tax credits during the quarter that will have a reduction of our federal tax rates going forward. But the timing of the payment of those versus the realization of the taxes will be between the third and the fourth quarter.

So as I mentioned in my remarks, our third quarter rate was a little bit higher than where it will be for the full year, but that caused a little volatility. So we would generally believe that we'll be in a free cash flow conversion more similar to where our percentages were last year in that 60% to 65% range.

The next question comes from Dany Asad with Bank of America. .

Pat and Scott. I -- look, your international growth strategy seems to be picking up steam. So my question is just give us a sense for how much rooms growth we could expect in the coming year on the international front? And then any color you can give us on key regions that would be driving that growth would be super helpful.

Yes. So let me just start with -- I mean when you look at our current business as we sit here today, it's about $3 billion in annual gross room revenue outside of the U.S. And so we have a real significant opportunity to capture more the fees from that from improving our value proposition. And so that's really the upside that we've been experiencing. And if you look at the supplemental materials, that we put in the -- on the website, we've really transformed that business over the last couple of years, moving to now a 40% direct franchising business, which is up 20%.

And moving about 1,400 hotels, which is about up 200 hotels from 2022 and then getting our EBITDA margin up over 70%. So those are all really positive healthy metrics. And we now have the talent and the brands and the business model to be successful in all 3 regions of the world. So just looking to your question, looking at the Americas, bringing the other half of Canada onto our platform and being owned by us now is a real huge opportunity for us. We have 355 hotels up there. And we now have the opportunity to unlock more value there. And it's important to recognize that the quality of the product up there and this is true throughout the world. But when you look at Clarion and Quality in, for instance, you're talking about 3- and 4-star hotels outside of the U.S.

So the RevPAR that those hotels are able to generate is significantly higher I was just down in Mexico a couple of weeks ago with our Caribbean and Latin American teams. We had about 110 franchisees down there who came to the event. And we've grown our rounds portfolio down there by 60% over the last 4 years. We're now in 21 countries. And the excitement around our brands, particularly the Radisson brand that we have down in that part of the world is pretty significant. When you shift over to EMEA, we've really got to focus on 2 key markets, it's France and Spain, and the teams out there have done a really remarkable job in bringing more new direct franchise agreements in. We doubled our presence in France this year, which is a really healthy market, and we're continuing to grow in Spain as well.

And we've mentioned a few of the new markets that we've entered into in EMEA as well. And then when you shift to Asia Pac, we've always had a strong business in Australia, direct franchising, and we just introduced the Mainstay Suites brand there with 7 hotels opening an additional pipeline for more with the developers of the largest extended stay brand in Australia. So we've got a really strong partnership there, but a good opportunity to bring extended stay to Australia and New Zealand. And then as we mentioned in China, we now have a really significant growth partner, upscale hotel company. I think they're probably the fifth largest in China. But we've already onboarded about 80% of the 9,800 rooms there with a long-term agreement to grow some of our mid-scale brands in China. So we really feel good about this sort of across the world. We've laid the foundation. All we need to do now is execute. And I feel like with the talent we have, the new business model that we have in some of these markets, and the brand strength that we have, that's a very achievable goal for us going forward.

The next question comes from Robin Farley with UBS.

My question is on the growth in international units. And -- how should -- what should we expect for fee revenue in 2026, so you have a full year of them? I know China's master franchise, a lot of the other countries are direct franchise. -- are the franchise fee percentages the same. And when you give the royalty rate increase, I think that's only for your domestic properties. So will you start including international or giving us international separately just so we can think about the franchise fees program from the international and whether that will look different in kind of fee per room in the U.S.

Yes, Rob, we will -- going forward, probably we get to February, we'll be giving you more of a kind of a global RevPAR number to look at. The growth we've seen this year is not like an anomaly. The growth is something that has been present in our business. And so what we're seeing with the kind of lack of international inbound is a lot of those travelers are staying home and traveling in their domestic markets. And our presence in a lot of those markets has always been focused on the domestic traveler, whether it be Canada or Mexico or France or Spain. So we feel like the -- we're well set up for the trends that we would expect to see on a go-forward basis. I think when you look at the royalty fee, that's the opportunity for us as the value proposition gets better.

In the U.S., we have that sort of effective royalty rate north of 5%. We have in our direct franchise markets, something less than that. And then in the MFA market, it's even smaller. So as we shifted from MFA to direct, we're picking up that effective royalty rate gain. And we would expect that to grow as we invest more in the value proposition. I talked in our remarks, about this $60 million investment that we have, we're almost through the end of it, a lot of that capability is global in nature. So whether it's rate management or revenue management tools or these platforms we have for capturing small and medium business travelers, -- these are tools not just for the U.S. market. They were built to be global in nature. And we do expect, as we deploy those in these regions, we're going to improve the value prop, which will then be constructive towards moving the franchise fees higher.

And just to add to that, Robin, I look at our direct franchising business internationally, the effective royalty rates there are around 2.7%. And for direct franchising. And that's really where we've been focused is. We talked about we've seen a 21 percentage point increase in percentage of our business that's direct versus master franchise agreements. So certainly an area that we're focused on. And really what I look at, as Pat mentioned, really focusing on continue to improve our value proposition in Canada, which we recently acquired, it's probably where we're the most advanced in terms of our capabilities in terms of delivering business and that royalty rate is closer to 4%. So we have a lot of opportunity across the other markets as we continue to increase our business delivery to be able to raise the effective royalty rates on those contracts.

Okay. Great. That's super helpful. Maybe just as a follow-up, you gave some pretty big increases for U.S. economy pipeline. And -- it doesn't seem like broadly, there's a lot of new construction going on in the U.S. economy -- is there something -- is it just that it's a small base is making a large percent change? Or what is it that you're seeing with new construction for U.S. economy rooms that we're kind of not seeing broadly?

Yes. The economy segment has been a conversion market for a number of years. And so what you're seeing there is the value prop as it has gotten better for the entire system. -- the value prop within the economy segment has benefited as well. And so I think a lot of people have interpreted our revenue intent strategy means we're not focused on the economy segment. far from -- that's very far from the truth. What we've been doing in the economy segment is improving the product quality. And so as owners see that we are exiting hotels that no longer stick up or stick to the brand standards or unable to they're seeing that we're not letting our economy brands deteriorate that we're actually improving the likelihood to recommend scores, the product quality. And that's important for the types of guests that we serve, that we keep that product quality moving in the right direction. And that's what's increasing the owner interest, and that's what's increasing the franchise agreements being awarded and the pipeline being higher.

And that's really illustrated by the RevPAR performance we saw both in the quarter for the economy segment as well as the full year. We outpaced the Economy segment by 180 basis points in the quarter and were up 310 basis points year-to-date. It really speaks to the quality of that segment for us.

The next question comes from Brant Munter with Barclays.

So just a quick question on some of the accounting and on the revenue side. You guys talked about ancillary and credit card being helpful. And I was just hoping you could help us with some of the geography because the partnership line grew 20%. I think that I thought that was with credit card, but the other revenue line sort of doubled year-over-year on a restated basis. And I just wanted to understand what was in that, if there's anything onetime that we need to think about a net other line.

Brent, to your point, our co-branded credit card as well as our procurement businesses and other -- our timeshare business, those are all on the partnership line item on our financial statement. So that's where you're seeing the significant growth in those revenues.

Our other revenues include more kind of event-driven onetime items at times. So there was some timing of recognition during the quarter. In addition, there were some items that really were gross up pass-through type expenses and revenue. So you'll see about about $3.5 million of that other revenue line item was offset by the increase in SG&A in the quarter. If you took a look at our SG&A in the quarter, it was a little more elevated mainly due to those pass-through items. So I'd say the other revenue is up due to some pass-through items and some onetime event-driven revenues. But overall, we're still on track to hit the full year forecast.

Okay. That's really helpful. And then another question on business travel, you guys gave some helpful stats. -- business travel 40%. I think that's a global basis of mix. And SME grew 18%, which is obviously a huge number for revenue. Could you just square that -- those data points with RevPAR overall in the U.S. being down 2-plus percent. The only way I can really do it is if SME is a really small piece of business travel overall. But maybe you can just sort of help us square that.

Yes. I think part of this is the business or the product mix that we are shifting towards. So we are shifting towards more products that is appealing to business travelers. So it's not just we're attracting more of them, but the product mix has shifted, particularly with this extended stay segment growth that we have here in the U.S., it's -- there's a lot of business travelers that are in those hotels for weeks. And so that's a key driver of that.

Overall, our business travel was up about 2.5%. And within SMB, that, in particular, has grown pretty significantly by 18%. So we're really leaning in on those types of travelers because of the product that we now have and the locations we now have, and that's where they're going. They're going to the secondary and tertiary markets where they have to travel.

So when I look at the mix of that and if the significantly higher total available market being $13 billion, we are not yet at our fair share of that, and we expect that to grow as we get better in our sales tools and we get better in our RFP responses that our owners are doing. And so I would expect to see that percentage growth continue into the future.

And the other thing I would just add to that is when you think about the headwinds, the 2 areas that are offsetting that are really government travel which was down about 20% for us during the quarter. And then inbound travel from the Canadian travel continued to be down since the first quarter. So that was down about 30%. So those 2 things have brought down RevPAR even though we've seen tremendous success in growing our business travel.

The next question comes from Meredith Jensen with HSBC.

With hoping you might speak a little bit more on the international growth side. I know you've spoken a lot about it. But in terms of building sort of the support infrastructure for this really strong growth that we expect. Could you help us walk through some of the associated investments that might be necessary or how to view that expense ramp? And relatedly, as you weigh those kind of investment that needs to be made in certain complex regions. Again, I know you've discussed direct versus Natter franchise metrics before. But given the investments you may need to make, just sort of how that may evolve over time.

Yes, Meredith, I think what's -- what we want to emphasize here is most of those investments are things we've done in the last 4 years. If you look at the exhibit we put on our investor website today, you can see the margin growth that we've had over that time frame. So the investments are not in adding people or in adding systems. A lot of the systems that we have put in place are already there and the investment I talked about that's going to effectively start deploying in early '26 and throughout next year.

Those investments are in the rearview mirror for the most part. So what we have to do international is execute. And so there is a real opportunity here to do that, bringing the other half of Canada into the full company was really an opportunity for us to bring all that we do here in the U.S. to our hotels that are in Canada. And so it's not a new market for us. We've been in Canada for 70 years. We operated as part of those 70 years with a very good joint venture partner for 30 of those years.

So we know these markets very well. And whether it's Canada or Australia, New Zealand, Mexico, Korea and Latin America, we've got people who've been in those markets for a significant period of time. Our development teams are based in those markets. We run the markets effectively as domestic markets, so they're not relying on U.S. inbound for their growth. And so the autonomy that, that has allowed them to have has given them the opportunity to build the talent and really protect the brands. I think the other thing that's really important for shareholders to understand is outside of the U.S., the business traveler mix is 60% and 40% leisure in many of our markets.

So we have a much more resilient and higher-paying customer base. And our brands, the quality and brand, the quality and the Clarion brand, in particular, are of higher quality. They are usually 3 and 4-star hotels. So it's a very different business. outside of the U.S. And so the opportunity for us to continue to grow there is significant, but we just have to execute. It's an opportunity for us to grow our value prop and therefore, grow the effective royalty rate, we're able to drive in those markets.

That's super helpful. And one other quick addition to sort of follow on to what Liz asked about. We've been following the cost pressures on the franchisees. And I have noticed that some of the brands, notably Hyatt, I think, are working sort of evolve brand standards so that they have more flexibility to take on limited service brands with sort of less ability to invest at this point. Are you seeing any of that in the market raising the competitive environment, especially as you up-level your franchisee base? Or if you're seeing any of that dynamic or if it's different in terms of PIPS than in the past?

Yes. No, it's a great question. And I think when we talk about the country and the Swiss brand, in particular, -- we redid that prototype with that franchisee margin compression in mind to make sure that the hallmarks of the brand are being preserved. But as you think about the types of changes that we would need an owner who's converting or a new build to build 1 of our brands, we are constantly looking at that. It's the reason why Choice has always been the leader in conversion hotels.

The flexibility to make sure that a PIP is affordable for the owner makes sense for the market and preserves the brand hallmarks. Those are the 3 things that we look to do. That's something that we always do as a matter of course. It's not new for choice. So I think when you look at our ability to continue to grow our business in good times and bad, that's a key factor in driving all of that.

There are no further questions at this time. I will now turn the call over to Pat Pacious for closing remarks. Please go ahead, sir.

Well, thank you, operator, and thanks, everyone, for joining us this morning. We look forward to speaking with you again in February when we report our fourth quarter results. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.